Dear,
As we commented in the previous post, the difficulties of integrating Bank Analyzer as a sub-ledger of non-financial processes are more related to marketing reasons and perceptions than real technical constrains.
I will try to make a simple description on this post.
The main objects for modelling a business deal in the Accounting for Financial Instruments module (sub-ledger scenario) of Bank Analyzer are the following.
- Business Partner. It’s the Physical or Legal Person with whom our company is having a business relationship.
- Financial Transaction (or Financial Instrument). It’s the representation of the financial contract that our company has with the business partner.
- Business Transaction. It’s an event of the real world, relevant for accounting which can potentially trigger a flow in a GL Account.
The objects above are not specific of a financial deal, but in fact to most, if not all, business deals.
All business deals have a counterparty with which our company is having the business relationship, the business agreement is represented by a contract (Financial Transaction), and a number of events happen in the real world, in relation to the contract, and can trigger flows in GL Accounts (Business Transactions).
For instance, let’s look at typical sales business deal, represented in SAP by a Sales Order, a Delivery (with Post Goods Issue) and an Invoice.
Every Item of the Sales Order represents the commitment of delivering a number of goods (or services), at a delivery date for an agreed price.
The Item of the Sales Order also represents the conclusion of a forward contract for delivering an underline (goods or services) at an agreed date (forward date) and price, with a Payment Date which is determined by the Delivery Date and the Payment Term.
On forward date we will create a logistics delivery (actually some days in advance as for fulfilling the delivery date we also must consider the picking, packing, transportation times, etc.) and the correspondent accounting entry as the forward contract has been settled.
At that moment our Sales Order Item (Forward Contract) has become an Account Receivable that will be cleared (if the counterparty fulfils his obligations) at Payment Date.
As you can see, there’s a parallelism in the business flow of a standard Sales and Distribution process with the events of a Derivatives Trading business flow.
The main difference between these two modelizations of the business deal is that the Sales and Distribution modelization puts the focus in the logistics process, while the derivatives trading modelization puts the focus in the Capital consumption (Market and Credit Risk).
Modeling the Sales and Distributions Process as a Forward Contract in Bank Analyzer gives us the opportunity of determining:
- The Capital Consumption due to Credit Risk, by determining the Exposure at Default from the Credit equivalent amount of the derivative and the Probability of Default of the counterparty (business partner on the deal).
- The Capital Consumption due to Market Risk by running a Value at Risk calculation (in future Bank Analyzer releases).
For years, capital was abundant and it was not necessary to estimate the Capital consumption due to Credit and Market Risk of most of business deals; that’s why we could afford modelling the business processes neglecting its importance.
But today, we’re in the middle of a systemic crisis generated by the new environment of capital scarcity. In this new environment, we can’t afford neglecting the cost of the capital that we consume in a business deal.
Consequently we’ll have to build information systems which include accurate measurements of the cost of capital of the business deal, and include them in the calculation of its contribution margin.
In my opinion, SAP Bank Analyzer technology is the answer to this requirement.
Looking forward to read your opinions.
K. Regards,
Ferran.
As we commented in the previous post, the difficulties of integrating Bank Analyzer as a sub-ledger of non-financial processes are more related to marketing reasons and perceptions than real technical constrains.
I will try to make a simple description on this post.
The main objects for modelling a business deal in the Accounting for Financial Instruments module (sub-ledger scenario) of Bank Analyzer are the following.
- Business Partner. It’s the Physical or Legal Person with whom our company is having a business relationship.
- Financial Transaction (or Financial Instrument). It’s the representation of the financial contract that our company has with the business partner.
- Business Transaction. It’s an event of the real world, relevant for accounting which can potentially trigger a flow in a GL Account.
The objects above are not specific of a financial deal, but in fact to most, if not all, business deals.
All business deals have a counterparty with which our company is having the business relationship, the business agreement is represented by a contract (Financial Transaction), and a number of events happen in the real world, in relation to the contract, and can trigger flows in GL Accounts (Business Transactions).
For instance, let’s look at typical sales business deal, represented in SAP by a Sales Order, a Delivery (with Post Goods Issue) and an Invoice.
Every Item of the Sales Order represents the commitment of delivering a number of goods (or services), at a delivery date for an agreed price.
The Item of the Sales Order also represents the conclusion of a forward contract for delivering an underline (goods or services) at an agreed date (forward date) and price, with a Payment Date which is determined by the Delivery Date and the Payment Term.
On forward date we will create a logistics delivery (actually some days in advance as for fulfilling the delivery date we also must consider the picking, packing, transportation times, etc.) and the correspondent accounting entry as the forward contract has been settled.
At that moment our Sales Order Item (Forward Contract) has become an Account Receivable that will be cleared (if the counterparty fulfils his obligations) at Payment Date.
As you can see, there’s a parallelism in the business flow of a standard Sales and Distribution process with the events of a Derivatives Trading business flow.
The main difference between these two modelizations of the business deal is that the Sales and Distribution modelization puts the focus in the logistics process, while the derivatives trading modelization puts the focus in the Capital consumption (Market and Credit Risk).
Modeling the Sales and Distributions Process as a Forward Contract in Bank Analyzer gives us the opportunity of determining:
- The Capital Consumption due to Credit Risk, by determining the Exposure at Default from the Credit equivalent amount of the derivative and the Probability of Default of the counterparty (business partner on the deal).
- The Capital Consumption due to Market Risk by running a Value at Risk calculation (in future Bank Analyzer releases).
For years, capital was abundant and it was not necessary to estimate the Capital consumption due to Credit and Market Risk of most of business deals; that’s why we could afford modelling the business processes neglecting its importance.
But today, we’re in the middle of a systemic crisis generated by the new environment of capital scarcity. In this new environment, we can’t afford neglecting the cost of the capital that we consume in a business deal.
Consequently we’ll have to build information systems which include accurate measurements of the cost of capital of the business deal, and include them in the calculation of its contribution margin.
In my opinion, SAP Bank Analyzer technology is the answer to this requirement.
Looking forward to read your opinions.
K. Regards,
Ferran.
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