Welcome back to the SAP S/4HANA Cloud use case series. After gaining some insight into the 2-tier ERP use case last week, we are moving on to another financial use case, this time in the context of the SAP S/4HANA Professional Services Cloud. Today we will be looking into the event-based revenue recognition and revenue planning for projects.
Finance in the SAP S/4HANA Professional Services Cloud
The SAP S/4HANA Professional Services Cloud helps you manage the entire project management lifecycle, find the right resources to the right projects at the right time and gain real-time visibility into the performance and profitability of engagements. Of course, financial planning is one of the key differentiators of the product and important in many different aspects. One is that it is necessary for every project manager to have real-time insight into the margin and revenue of each project to react when a project does not have a healthy margin and resolve the cause of the margin not meeting the expected target. Understanding past and current performance and seeing forecasts for the future helps the project manager to ensure projects are profitable and clients are happy. This full transparency into the financials will provide the project manager with the information he or she needs to make each engagement a success.
Event-Based Revenue Recognition
The project manager does only have the authority to view the information. The actual handling of the data is done in the controlling department with a specific app “Event-Based Revenue Recognition”.
Let us compare one example in the classical SAP ERP and in SAP S/4HANA. We assume there is an ongoing project and one of the consultants reports time spent with the customer. In the classical SAP ERP this would lead to a registration of the cost, but not for the related revenue, as this will only be considered after the time has been invoiced and billed to the customer and period end. One consequence is that the project manager doesn’t have the accurate information, as the margin of the project only takes the costs into consideration until the point in time when the invoicing has been done.
In SAP S/4HANA Cloud and of course the SAP S/4HANA Professional Services Cloud we are working with the event-based revenue recognition, which has the purpose of real-time reporting, so to recognize costs and revenues as they occur. The recognition and adjustment postings are generated simultaneously with the transactions and directly posted in accounting by the controller. In our example that means that when the consultant records his or her time and the project manager approves it, the cost is recognized and the related revenue will be calculated and posted. The entry of a source document, in this case the time confirmation, produces two separate journal entries: a journal entry for the initial cost or revenue posting and a journal entry for the revenue recognition posting.
Reported profit and margins are always up to date and the matching principle and cost of sales reporting is provided. In addition, reconciliation is not needed, as the revenue recognition process is fully integrated with G/L and the revenue recognition data is stored in the same location as cost and revenue data. Furthermore, through the ability to drill down from a revenue recognition journal entry to the cost or revenue journal entry and to the source document, full transparency is given.
This supports the complete cloud „Project Based Services“ scope with the contract types:
- fixed price,
- time & expense and
- periodic billing
To give a comprehensive understanding of the overall event-based revenue recognition process, it is important to know that processes that do not write a prima nota will not result in any event-based revenue recognition posting, for instance changes of plan data will not directly result in revenue recognition postings. In addition, if necessary, period-end-closing postings, so periodic revenue recognition, will correct the event-based postings. Finally, yet importantly, manual revenue recognition postings are also possible and supported by the event-based revenue recognition.
Let us move from the perspective of the controller to the perspective of the project manager, how does a project manager know what the current margin of his or her project is? In the app “review customer projects”, he or she has a complete overview of the projects he is currently working on. He/she can see the actual margin, revenue, and expenses, as well as the percentage of completion. When a consultant reports time spent on a customer project, this information will trigger the event-based revenue recognition process for the controller, who posts the costs and related revenue to the relevant account and updates the project immediately, so that the project manager is always on top of the latest information. Not only is he/she able to see the hours booked, but also the impact it has on the revenue and margin, without waiting for invoicing or monthly financial statements.
In this video you can get a quick insight into the event-based revenue recognition from the perspective of the project manager.
Further enhancements with 1702
Furthermore, with the latest release in February 1702, the functionality in the planning app has been enhanced. The project manager is now able to do the project pricing planning on a more detailed level than before, which means he/she can now even drill down to a service pricing on a granular level, such as role and employee specific pricing. This leads to a more detailed revenue analysis, margin calculation, profit analysis and therefore to a greater understanding of planned revenues even before actual project start. More flexibility same employee different price rate in different projects or even work packages. With all of this information in real-time the project manager is equipped to react fast if necessary, run projects successfully and ensure that the customers are satisfied.
Mapped value levers
In the last step, we will map this use case to the relevant value lever that we have examined in the first three blogs in the series. Out of the three dimensions “increase efficiency”, “increase effectiveness” and “increase agility”, this use case relates most closely to “increase effectiveness”. With event-based revenue recognition, the process intelligence is considerably increased, as we deliver real-time information to the project manager and controller, as well as the signal-to-action, as the project manager can react much quicker now.
Stay tuned for the next use case, in which we will examine a Finance use case in the SAP S/4HANA Manufacturing Cloud and map it against the value levers and dimensions.
For more information on SAP S/4HANA Cloud, check out the following links:
- SAP S/4HANA Cloud release information: http://www.sap.com/s4-cloudrelease
- Product documentation and What’s new in SAP S/4HANA Cloud 1702 available here
- Best practices for all the cloud editions here
Follow us via @SAP and #S4HANA, or myself via @SDenecken