Why ERPs can never be used in Financial Analysis: Incompatibility of Data set between Accounting and Budgeting, and the two missing mechanisms

As we have previously seen, both Accounting and Financial Analysis, deal (in principle) with the same concepts (sales, purchases, salaries, ads etc). However, the information data sets they use, are incompatible with each other.

Financial Analysis and Budgeting, work on a concentrated form of data. For example: “Forecasted sales of May = 10 mil USD”. On the other hand, Accounting works on an “individual invoice” on a “specific date” level. Any attempt to make an Accounting entry out of the forecasted sum, would not yield any better result than the “Monthly Average” method. However this action (performed within an ERP) will deprive the user of all the advantages of working in a spreadsheet, like automatic recalculations, some basic ability to handle “What if” scenarios etc.

ERPs do not have the correct mechanisms to automatically calculate derivative sums and their relevant cashflows, and automatically feed them back in the workflow, without any human intervention.

Examples of such events are the VAT payment, Interest Income, Interest Expense, payment of withheld taxes, Income Tax, distribution of earnings etc. These tasks are performed manually by the Accountants, and any relevant tools that might exist in the ERP, simply provide same help and guidance to the user, but do not make automatic decisions by themselves. In order to fully understand the complexity that is needed to create such a mechanism, you should see the CCF (Calculated CashFlow) set-up requirements in C2BII.

ERPs do not have any mechanism at all to handle “What if” scenarios.

The reason for that, is that in Accounting there is no uncertainty. You have your invoice in front of you and you enter it into the books. The date of issuing of the invoice is final. The sum that you will pay (or collect) is final. The credit terms of the invoice are final. In Financial Analysis you constantly have to worry about what it means if we make only 92% of the forecasted sales etc. In order to fully understand the nature of the mechanism that will handle “What if” scenarios, you should see the Variation Factor set-up requirements in C2BII.

Stick around, as we are going to discuss the problems about the method thru which the CashFlow is currently being performed.

This entry was posted in Budget, Budgeting, C2BII Instructions, CashFlow, Financial Analysis, Financial Analysis Method, Investment Plan Evaluation and tagged , , , , , , . Bookmark the permalink.

One Response to Why ERPs can never be used in Financial Analysis: Incompatibility of Data set between Accounting and Budgeting, and the two missing mechanisms

  1. Pingback: What is the basis of the method of C2BII? Part 1: Finding the right questions | CEO on Financial Analysis

Leave a Reply