Central Finance – a non-disruptive pathway to adopting S/4HANA
Below are some of the Questions many of our customers ask us often :
- “What is Central finance?”
- “What is the difference between Central Finance and S/4HANA?”
We had to explain to them that SAP Central Finance is a function activated within a S/4HANA system. This CFIN function enables the S/4HANA system to:
- Seamlessly receive real-time financial accounting transactions from SAP or non-SAP ERP source systems.
- This real-time integration is achieved by System Landscape Transformation (SLT). For more details of SLT please refer to https://www.sap.com/products/landscape-replication-server.html
- As a part of the SLT integration mentioned in the above point; downstream system master data are enriched with the equivalent central finance system master data.
- Each downstream Financial transaction document is thus replicated with an equivalent CFIN document.
Courtesy SAP SE
After hearing the above explanation from us; most customers replied that they already manage to do that with their existing BI systems. If Central Reporting can be achieved in a BI system. This raises the question why do they need an S/4HANA based Central Finance system?
That is when we had to explain that Central Finance is not about Central reporting but beyond. Yes with the harmonized data Central Finance provides S/4HANA based advanced reporting from the data received from all the downstream ERP’s. However the main highlight of Central Finance is the scalable execution of business processes.
CFIN = Centralization of Processes
In the above example we have three subsidiary companies within the group; which operate in three SAP and non-SAP ERP’s. The ERP’s of these subsidiaries replicate finance transactions and balances in the central finance system for the group.
Since these companies operate in their respective ERP’s; all the logistics processes for example Order to cash or procurement are performed in each of the source ERP systems themselves. However finance processes like intercompany reconciliation, cash application, budget monitoring are performed in the Central finance System. Hence we use the term centralized processes for the finance processes carried out in CFIN. However for the logistics processes carried out in the Source ERP’s we use the term local processes.
This is a major benefit of CFIN is that it allows this centralization of processes. Also this centralization can be done in stages.
Evolution of Centralization of Process
In such a heterogeneous landscape; each subsidiary company uses its own ERP; the master data and organization structure within each ERP is different. Such a landscape makes a corporate group level reporting a nightmare. Also intercompany reconciliation cannot be done meaningfully, takes a lot of effort. The reason is master data is duplicated in each ERP; also underlying master data and Organizational Hierarchy is different.
The recommended approach in such scenarios is to start with a central finance system. Each one of subsidiaries upstream ERP’s can be connected to the central finance system. The real time replication via SLT records all the source ERP financial transactions into CFIN. The beauty of central finance is the real time replication takes care of the translations as well. i.e. changing the subsidiary ERP organization structure and master data to the central finance org structure and master data.
Such a project to convert to central reporting system enabled by CFIN can be fairly quick. Usually is done within 3-4 months.
In the above scenario the process will be still run in the source ERP’s belonging to the subsidiaries and central finance only serves purely as a central reporting solution. The only other benefit that central finance provides is apart from group level reporting you can also perform certain closing processes like intercompany reconciliation, Maybe some managerial reporting processes allocation of costs but nothing beyond.
After Central Finance is implemented, the Centralization of process can follow. To start with Finance processes particularly period end processing is done in CFIN. Moving the logistics processes from the subsidiary ERP’s is expected to be driven by strategic vision; since the corporate is expected to drive that.
- A private Equity firm might choose to retain the ERP’s of each subsidiary. Also most often these subsidiaries will continue to operate as sperate legal entities.
- Whereas an a normal Corporate parent might chose to retire multiple ERP’s belonging to each subsidiary and move into one central ERP instance. Also the subsidiaries often cease to exist as separate legal entities and become Business Units of the Parent.
Processes centralization strategy within the CFIN system has to be aligned with the group’s ERP vision.
- If the Group chooses to have a single ERP then Centralization of both Finance and Logistics processes can happen within the S/4HANA system.
- If the Group chooses to have a multi-tier ERP as their model then Finance processes can be centralized. Whereas the Business Operation or logistics process continue locally in the respective ERPs.
Finance – Scalable Execution of Local vs Central Processes in Multitier ERP
At the start the both finance and logistics processes are done in the ERP’s belonging to each subsidiary. However finance processes can be moved in a scaled fashion into the Central Finance system. The main value derived out of centralization is cross-organization shared service which opens economies of scale
Stage – 1 :
The below are the processes can be centralized as the first step.
- Entity Close
- Corporate Close
- Monitoring and Reporting
- Planning, Budgeting and Forecasting
- Profitability and Cost Management
- Cash and Liquidity Management
- Receivables Management
Stage – 2 :
The below are the processes can be centralized subsequently after the initial step.
- Financial Close Governance
- Reporting and Disclosure
- Payments and Bank Communications
- Invoice Management
- Financial Shared Services
- Fraud Management
The below are the processes also can be centralized but are not strategic for most companies.
- Strategy Development and Translation
- Debt and Investment Management
- Financial Risk Management
- Commodity Risk Management
- Travel Management
- Real Estate Management
- Enterprise Risk Management
- Controls & Compliance Management
- International Trade Management
- Audit Management
Central Finance Possible Business Process Scenarios
Below is the possible landscape where the finance processes are run in CFIN. This CFIN system is connected to other satellite systems like Ariba, Concur etc..
Courtesy SAP SE