Event-Driven, Continuous Accounting: A Transportation Use Case

Luciano Morra

With the increasing pressure to have timely, deep, and reliable information to run businesses in a more competitive way, continuous accounting and real-time controlling come into play to provide the foundation for the modern finance practice.

In a recent study conducted by The Hackett Group, about 69% of CFOs reported that manual processes are still the biggest bottleneck in financial close and accounting operations. Most of these processes still require extreme resource effort and lots of manual postings (such as manual accruals and distribution processes) at the end of every accounting period, despite the huge automation potential in accounting and controlling.

The CFO, in the new strategic role, will be responsible for the wider corporate data in the future. But two-thirds of senior finance executives recognize that “an inability to master the variety and volume of new business data is a serious threat to the future finance function” (FSN – The Future of the Finance Function, Survey 2017).

What we are seeing in recent years is a shift from traditional period-based accounting lifecycles to an advanced process that can enable extended finance data models with event-driven accounting and controlling paradigms.

This approach leverages new technology capabilities offered by real-time in-memory technologies that allow you to:

  • Manage business processes inside the ERP system with a multidimensional data granularity never seen before
  • Establish a direct, live connection to common industry legacy systems
  • Automate financial and closing processes
  • Ultimately manage a continuous and automated analytical accounting process independent from periodic closing regular deadlines

A case applied to a high-speed railways company

 

To explain the different approach of the event-driven paradigm, let’s show an application for a passenger railways company that runs more than 250 trains per day with different routes, speeds, products, and regions.

Each train, operating daily on a certain time schedule, is a cost generator and a revenue collector according to respective activities and assets used or passenger flows and transport demand.

The trains’ analytical cost and margin analysis are strategic for making proactive decisions related to operations optimization and benchmarking, line or product distribution balancing, procurement efficiency, and in the end, meeting customers’ and stakeholders’ information needs. But these analyses often can be performed only a certain number of days after the month-end, at an aggregated level, with a demanding – and often manual – process for accruing costs on the basis of estimated drivers collected across the company.

Event-driven accounting versus period-based approaches enable real-time visibility into value flows related to a single train and allow the company to:

  • Account for direct operational costs at the source, when the transport event occurs, based on transactional and operational event data
  • Recognize costs directly absorbed by a specific daily train with all related data – segment, route, activity, etc.
  • Record cost and revenues in a multidimensional journal entry line item
  • Provide train, segment, and route margin analysis on each level

Most processes are executed in a continuous and automatic flow, even though in exceptional cases (such as rebooking passengers) cost recognition can be initiated by contact centers that will activate ad hoc purchasing processes or execute additional unpredictable activities.

But what are the triggers in this continuous accounting process?

In the rail business model, two main events recorded by the traffic control system are the triggers for ongoing revenue and cost recognition:

  • The train departure event automatically creates in the ERP system the train order object; the operational collector of all journey measures (train set used, route length, duration, etc.); and financials (standard prices, cost, revenues).
  • The train close event automatically transfers to the train order effective journey data and calculates cost absorbed on each distinct train.

Costs depend on the train’s physical and commercial standard configuration (rolling stock composition, number of seats, load factor, energy consumption, crew assignment, service provision, etc.). The train order is the accounting object able to absorb activities and resources defined through a distinct task list for each train set.

Also, revenues are automatically accrued on the train for all tickets sold on the route at the completion event of the journey by the reservation and billing system.

If the train order is the vehicle to capture costs and revenues whenever the relevant event is generated, full visibility into all train-related dimensions (train category, route, activity, or channel and customer for revenue analysis) is ensured by posting financial data with a multidimensional coding block in the financial journal.

Modern financial ledgers, in fact, can integrate natively general and managerial accounting and extend “on the record” financial, commercial, and industrial data availability to respond to every stakeholder’s information need, no longer limited to the CFO function alone. Analytics embedded into the ERP in this way can analyze, in real time, marginality and KPIs, making use of all profitability dimensions. Users can drill down to every line-item detail without data manipulation, reconciliation, enrichments, or data transfers to external data-warehouse reporting systems.

Correct engineering of the multidimensional finance data model and the continuous accounting rules is, therefore, the key strategic factor for realizing value in implementing next-generation ERP systems.

The role of technology in event-driven accounting processes

Event-driven accounting and control models are one example of how new technologies can bring strong innovations into the finance domain:

  • In-memory platforms enable finance Big Data management that allows instant analysis of business levers.
  • The unified and certified multidimensional financial journal can manage all transactional data with a granularity never before possible.
  • Event-generated controlling objects available in ERP systems can trace and recognize ratios and financial values when a significant event is captured.
  • Real-time analytics embedded in the ERP system allows the business to drill into financial data, fly across all dimensions without restrictions, compare data among periods, and make predictive estimations based on correlating existing granular data.
  • Strong automation and process integration between operational legacy systems and ERP ensure a transparent, 24×7 live connection and data exchange without interruptions.

Event-driven models, therefore, need a structured and focused architecture design to assure a real-time dialogue among applications leveraging a finance Big Data paradigm in an integrated and multi-platform landscape.

Real-time accounting models: the value in finance and controlling processes

Event-driven accounting methodologies produce a huge benefit in service industries like railways, airlines, airports, and cargo transport, where several “production events” are performed in a single day and costs are absorbed according to a “bill-of-service” – a mix of activities, assets, and variable resources needed for executing each distinct service event.

But generally speaking, continuous accounting principles can be adopted by every company. The value lies in anticipating cost and revenue recognition at the moment the obligation is fulfilled, instead of accruing them by demanding apportionment slotted into a limited close cycle and lengthy reconciliation tasks.

Given the removal of past ERP technological constraints related to volume, width, and speed, the shift from a period-based to event-driven continuous accounting approach becomes an extraordinary opportunity to create value in the finance and controllers department.

The CFO agenda can now move from disclosure, compliance, and bookkeeping towards a partnership role, where the CFO feels confident to drive strategic decisions, measure out multiple business levers, and understand, in the moment, their impact on operating and financial performance.

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Luciano Morra

About Luciano Morra

Luciano Morra is a business transformation chief consultant at SAP. As part of the SAP Digital Business Services organization, he is responsible for business development, value transformation road map design, while leading our internal and customer resources for achieving plurennial innovation goals. Primarily focused on CFO process innovation, Luciano has helped a variety of companies – serving industries including transportation, railways, services, and utilities – shape and implement their digital transformation journey in their finance organizations. He works closely with IT and finance executives to review business models, reengineer accounting and control processes, and drive changes induced by corporate restructuring or industry regulations. Before joining SAP, Luciano spent 15 years with Big Four firms as a strategy and operation advisory manager in technology, media, and telecommunication market sectors.