Financial Management in Business Central

You can manage all common finance processes and information such as posting financial transactions, preparing financial statements, managing bank accounts, inventory costs, manufacturing costs, and fixed assets in Business Central.

Chart of Accounts

When you create a new company, you must first set up a chart of accounts and configure the posting processes. The chart of accounts in Business Central looks something like this:

Use these accounts to post transactions to the general ledger. You can setup balance sheet accounts and income statement accounts. Besides the basic setup, you can also set up advanced features related to GST.

Once G/L accounts are created, you can then use them in sales and purchase documents and in general journals to post transactions to the general ledger.

Dimensions

In Microsoft Dynamics 365 Business Central, you can make use of dimensions for advanced transaction analyses.

You can set up dimensions and then assign multiple dimension values to each dimension. Once dimensions are set up, you can assign default dimensions to customers, items, vendors, G/L accounts, jobs, resources and many more.

Examples: Before posting sales, you can assign a customer group dimension to a sales document. Or you can assign a department when posting expenses so that you can analyse and compare your expenses by department.

Processing Payments

From the payment registration page, you can process customer payments with only a few clicks and mark invoices as paid to automatically reconcile accounts.

To pay your vendors, you can use the payment journal, including advanced features such as vendor priorities and paying invoices on their due dates. To do so, you can run the suggest vendor payments batch, modify the payment journal lines if necessary, and then process the payments electronically or by check.

With the payment reconciliation journal, you process and reconcile bank statement transactions in one go. Use the import function to import bank statement files and let the system apply transactions automatically using advanced application rules.

Cash Flow Forecast

To get a better grip on their cash position, companies want to know how their cash flow will evolve in time. The cash flow forecast function uses a whole range of sources to calculate the future cash flow to receivables, payables, purchase orders and sales orders.

You can use manual revenues and expenses to analyse the impact of a future loan or an unforeseen future cost. By including Cortana Intelligence, machine learning is used to calculate the cash flow forecast based on historical income and disbursements.

Budgets

You can work with budgets for general ledger accounts, costs, sales and purchases.

Deferrals

You can set up deferral templates that automate the process of deferring revenues and expenses over a predefined schedule.

Fixed Assets

You can keep track of fixed assets and related transactions, such as acquisitions, depreciations, write-downs, appreciations, and disposals.

Audit Trails

Microsoft Dynamics 365 Business Central automatically assigns audit trails and posting descriptions to every transaction. In addition, you can define reason codes to create complementary audit trails.

Bank Account Management

You can create, operate, and manage multiple bank accounts to cater to your diverse business needs and across different currencies.

Reconcile your bank statement data automatically to open bank account ledger entries and keep track of all your bank statements.

Currencies

You can Manage multiple currencies throughout the system, including payables and receivables, general ledger reports, resource and inventory items, and bank accounts.

Accounting and Financial Statement Basics

The Flow of Funds

  • The flow of money or funds goes upstream from customer to producer and from producer to supplier as intermediate or final products or service are paid for.
  • This funds flow is not linear since some upstream payments may occur long before the final good or service is even purchased.

Why is it critical to improve the flow of funds within a supply chain? There are several advantages to better flows:

  • It reduces cash-to-cash cycle time.

    (Definition) Cash-to-cash cycle time is an indicator of how efficiently a company manages its assets to improve the speed or turnover of cash flows.

    What is considered a normal duration for cash-to-cash cycle time will differ by supply chain, industry and organizational strategy.

    It is not necessarily possible to compare cycle times without understanding the relevant strategies for each business. However, an organization’s cycle time is a bench mark for its own continuous improvement.

  • The improved turnover of funds improves customer-supplier relationships through lower perceptions of risk, improved reliability and better communications which in turn tend to further improve relationships, yielding a win-win situation throughout the supply chain.
  • Improved cash flow tend to reduce imbalances between the layer and smaller players in the supply chain. Consistent rules for integrated cash flows across the supply chain help avoid the situation in which sizable retailers request more liberal payables terms from manufacturers and large manufacturers do the same with their smaller suppliers.

Spend Management

  • The initial efforts in supply chain management focused primarily on cutting costs because the supply chain constituted one long cost center. It was all about removal of waste, time, unnecessary motion, defects and extra costs.

(Definition) Spend Management is managing purchases of goods and services in a supply chain, including outsourcing and procurement activities.

  • Spend management often deal with consolidating internal demand across business functions, divisions or extended partners and/ or consolidating suppliers to find areas of purchasing and transportation quantity rate discounts.
  • Relative to financial performance, spend management involves managing the outflow of funds in order to buy goods and services. Spend management may also need to coordinate closely with accounts payable because payment timing is vital to spend management execution.
  • While spend management is used by supply chain managers to control external costs, many organizations use a system such as standard costing to control internal costs related to the goods or service being produced.

Standard Costing

(Definition) Standard Costs are the target costs of an operation, process or product, including direct material, direct labor and overhead charges.

(Definition) Standard Costing or Standard Cost Accounting System is a cost accounting system that uses cost units determined before production for estimating the cost of an order or products. For management control purposes, the standards are compared to actual costs and variances are computed.

Standards are targets that the organization sets to show the expected or desired outcome of an activity. These are periodically reviewed and changed as needed.

Some additional terms in standard costing:

  1. Cost of Goods Sold (COGS)

    An accounting classification used for determining the amount of direct materials, direct labor and allocated overhead associated with the products sold during a given period of time.

  2. Current Price

    The price currently being paid as opposed to standard cost. A related term is marked price, which is going price for an item on the open market.

  3. Usage Variance

    Deviation of the actual consumption of materials as compared to the standard.

  4. Cost Variance

    In cost accounting, the difference between what has been budgeted for an activity and what it actually costs.

Each cost has two components that are set as standards: Volume and Rate.

Cost = Volume X Rate
Direct Material Costs = Qty. Purchased X Unit Cost
Direct Materials Used = Qty. Used X Unit Cost
Direct Labor Cost = Standard Hours X Hourly Rate
Overhead Cost = Cost Driver X Total Overhead
Total Cost Driver

Volume: It is how many units of resource is purchased or used.

Rate: It is the cost per unit of that resource.

  • When volume has variances from the standard, it is a usage variance.
  • When the rate has variances, it is a cost variance.
  • Both variances are tracked separately and their sum should equal the total variance. Variances can be positive or negative. Negative variances occur when costs are greater than expected; positive variances occur when costs are less than expected.
  • Overhead costs are allocated costs based on a cost driver. A cost driver is simply a measurable aspect of an operation that is used to approximate how much of the overhead should be associated with the units produced.
  • A frequently used cost driver is direct labor hours.

Uses of Standard Costing

  • Standard costing is used to estimate the cost of goods sold before all costs are known with certainty. It also provides benchmark targets for use during production. Thus it is a method of controlling a process during production rather than only being applied by documenting after production is complete.
  • Inventory can be valued using standard costing, although other methods also exist.
  • If standard costing is used at an organization, efficiency can be calculated using a formula:

Efficiency = (Standard Hours of Work / Hours Actually Worked) X 100%

Financial Statements

Financial statements help managers and investors track the financial results of an organization’s activities.

Balance Sheet

(Definition) A financial statement showing the resources owned, the debts owned and the owner’s share of a company at a given point in time.

  • The balance sheet is often called “snapshot” of the company’s financial position, because it is a static view of financial value or net worth at a point in time, usually the last day of the fiscal year, though it could also be for the end of any reporting period, such as month or quarter. It gets its name from the fact that it has two major sections that have to be in balance – assets on the one hand and liabilities and owner’s equity on the other.

Assets = Liabilities + Owner’s Equity

  • The balance sheet sections are always in balance because owner’s equity is simply the difference between assets and liabilities.
  • The balance sheet shows the increase or decrease in assets, liabilities and owner’s equity from year to year.

(Definition) Accounts Receivable are the value of goods shipped or services rendered to a custom on which payment has not yet been received and usually includes an allowance for bad debts.

(Definition) Accounts Payable are the value of goods and services acquired for which payment has not yet been made.

  • These two balance sheet amounts are used to calculate the cash-to-cash cycle time, which measures how many days the organization’s working capital is invested in managing the supply chain.

(Definition) Working Capital is the current assets of a firm minus its current liabilities.

  • Working capital is important to the supply chain because these are the funds the organizations has readily available to invest in normal operations.

Income Statement

(Definition) A financial statement showing the net income over a given period of time.

  • Income statement is cumulative and dynamic, meaning that the statement covers business results over a period of time, such as a quarter or a year, rather than being a static snapshot.
  • The income statement shows managers, investors and creditors whether the company has made or lost money during the given period of time.

Income = Revenues – Expenses

  • These are the key terms to be familiar with:
    • Profit

      It is money remaining from revenues after deduction of certain expenses.

    • Profit Margin

      It is the difference between the sales and cost of goods sold…sometimes expressed as percentage of sales.

      This measures the degree of financial success for a business.

    • Gross Profit Margin

      It is the difference between total revenue and the cost of the goods sold.

    • Net Profit

      It is figured by deducting all expenses, not only the cost of goods sold, from revenues.

  • Supply chain managers can use an income statement to determine the effect of supply chain expenses on net income.
  • Operating expenses such as sales bonuses or general and administrative expenses (all cost that cannot be linked to specific unit sold) are called period costs because they must be expensed in the period in which they are incurred.
  • COGS are called product costs. Product costs are accounted for in the period in which the units are sold even though many of these costs may be incurred in earlier periods.
  • Matching refers to reporting related revenues and expenses together in the period in which they were incurred. For example, sales expenses incurred to make a sales should fall in the period the sales was made. When they do not, accountants use adjustments called “accruals” to account for the period differences.

Statement of Cash Flows (Funds Flow Statement)

(Definition) A financial statement showing the flow of cash and its timing into and out of an organization or project (over a given period of time).

(Definition) Cash Flow is the net flow of money into or out of the proposed project organization. It is the algebraic sum, in any time period, of all cash receipts, expenses and investments.

  • There are three factors that determine cash flows:
    • Sales
    • After-tax operating profit margin
    • Capital requirements
  • The purpose of a statement of cash flows is to show lenders, investors and creditors whether the organization has sufficient cash to pay debts, bills and dividends to owners because cash, not net income, is needed to make these payments. The after-tax net income on the income statement is not the same as cash flow, but it is the starting point for the statement of cash flows.
  • Being able to read and understand a cash flow statement is important because it enables you to assess if the firm is:
    • Generating enough cash to fulfill its minimum obligations to lenders, investors and governments (taxes).
    • Generating extra cash that can be used to repay debt, purchase additional assets for growth or invest in new products.
  • This information is particularly helpful for financial managers, who use it along with a cash budget when forecasting their organization’s cash positions.
  • Depreciation is a predetermined incremental reduction in the value of fixed assets, such as property, plant and equipment on the income statement to account for their deterioration over time. This provides organizations a tax benefit to offset the investment in fixed assets.
  • Since depreciation reduces net income on the income statement but doesn’t reduce actual cash levels, depreciation is added back on the statement of cash flows to determine the actual cash flow.

Tax Savings and the Supply Chain

Paying less in taxes around the world translates into increased earnings per share.

Procurement and Taxes

  • Multinational corporations may decide to set up a central, global procurement and sourcing center.
  • In this way the supply chain benefits from various efficiencies created by consolidation of staff and equipment. If, in addition, the company locates the global facility in a low-tax region, the tax savings will magnify the savings from efficiencies of scale. This works because tax authorities generally levy taxes on separate streams of corporate income depending upon where they are earned. The global procurement center thus becomes subject to the tax policies of its country of residence.

Taxes & Logistics Networks

  • Organizations can also realize tax savings by combining tax planning with logistics reengineering projects.
  • While they are cutting lead times, reducing manufacturing costs and shaving transportation outlays they can also reduce their global tax liability by closing facilities in high-tax jurisdiction and moving them to countries with lower tax rates.

Taxes & Information Technology

A particularly intriguing tax-saving strategy is the purchase of supply chain software to improve planning and responsiveness. The cloud be an enterprise resource planning (ERP) system or a system with more limited application.

Competing Values

  • Whenever you are discussing supply chain financials, remember that each department in an organization has its own particular priorities based on its activities and those priorities may compete with each other.
  • For instance, the primary objective of marketing is to maintain and boost revenue and it strives toward that by providing great customer service.
  • Although the finance function is also interested in increasing revenues its primary focus is on keeping costs and investment expense low.
  • Production wants the lowest operating cost it can achieve. Those conflicting viewpoints may spill over into how each function views financial departments and metrics.

Supply Chain Management Objectives

Supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products or perhaps services for distribution to customers.

(Definition) Supply Chain Management is the design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply chain demand, and measuring performance globally.

Other highlights:

  • Supply chain management is about creating net value.
  • There should be value creating activities in the supply chain that transcends the activities of particular entities in the chain.
  • Managing supply chain requires a balancing act among competing interests.

Value Chain and Mapping

Value Chain

A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services.

(Definition) The value chain is made up of the functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.

The intent of a value chain it to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user.

Not all value chain activities are technically part of the supply chain. Those activities might include:

  • Engineering
  • Marketing
  • Finance
  • Accounting
  • Information Technology
  • Human Resource
  • Legal

Value Stream

(Definition) It is the process of creating, producing and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of good, and the distribution network.

For a service, the value stream consists of supplier, support personnel and technology, the service “producer”, and the distribution channel.

The value stream may be controlled by a single business or a network of several businesses.

A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing.

Value Stream Mapping
(Definition) Value stream mapping is drawing the current production process/flow and then attempting to draw the most effective production process/flow.

Mapping the stream aids in process improvement.

Key Objectives

There are five primary objectives that supply chain management can help a company or organization accomplish:

Objective 1: Add Value for Customers and Stakeholders

Supply chain management aims to create value through financial benefits, match the values of its various customers, and appeal to social value of its customers, stakeholders and community.

(Definition) Value is the worth of an item, good or service.

Adding value to a good or service is the responsibility of each entity and process in the supply chain.

(Definition) Value Added is the actual increase of utility from the view point of the customer as a part is transformed from raw material to finished inventory. It is the contribution made by an operation or a plant to the final usefulness and value of a product as seen by the customer.

The goal is to add value at each step in a service oriented value chain as well as in manufacturing oriented supply chain.

Utility may not be the only value, or worth, of a good or service from a customer’s point of view. Price, availability, and attractiveness are also values to consider.

Financial Benefits: Profit and Profit Margin

  • Adding value that customers desires promotes increased sales, which improves the bottom line.
  • In order to be successful and have longevity, any organization must have a positive cash flow.

* Triple Bottom Line (TBL):

  • Term coined by John Elkington 1994.
  • This refers to the concept that corporate success should also be measured in 3 dimensions:
    • Economic
    • Social
    • Environmental

Measuring Value One Stakeholder at a Time

  • When planning any new supply chain activity or monitoring continuing practices, it is important to identify all the stakeholder groups and determine the impact the activity will have on each one.

  • The primary stakeholder in any business is the business itself. A business must be profitable to survive and create value for any other stakeholder group.
  • Customers are also significant stakeholders in supply chain. Each business must create value for its customers as well as profits for itself. Moreover, the end result of each partner’s activities must optimize value for the supply chain as a whole.
  • There are also stakeholders that are external to the supply chain’s business partners and end customers. These include public or private investors, lenders, and communities and governments. To investors and lenders, supply chain value may be defined as capital growth, dividend income, or interest payments and eventual return on invested capital. Value as defined by these external partners must be considered when making business decisions.
  • Communities and local governments may also feel the impact of supply chain operations because they affect community members and their environment, both built and natural. The location of a retail outlet, warehouse, or other supply chain facility will have impact on the community where it is built and maintained. The community, and its political leadership, may judge this impact to be a positive value or a detriment.

Balancing Varied Stakeholder Values

Supply Chain Stakeholders Stakeholder Values
Firms in supply chain Profit margin, market share, revenues, expenses, image and reputation.
End customers Affordable, safe, attractive, useful products; affordable, timely, secure, easy, pleasant services; sustainable manufacturing practices.
Investors Return on Investment (Capital growth, dividend income), comprehensive and comprehensible communications.
Lenders Interest rate, long-term stability, return of principal.
Communities / Environment Tax based enhancement, sustainable manufacturing practices, environmental impact (safety, ethics, convenience, and natural resources), and growth of attractive jobs.
Governments Legality, regulation, overall impact on community members and environment.
Employees Job security, wages and benefits, opportunity, good working conditions, sustainable and safe manufacturing process.

Green, Sustainable Supply Chain Management

  • One value that is important to most of these groups is sustainable manufacturing process and practices, because it impacts so many around the globe.
  • Green Supply Chain Management (GSCM) has been brought to the forefront of most companies’ strategic goals in response to the demands from customers and stakeholders.
  • The objective of supply chain sustainability is to create, protect and grow long term environmental, social, and economic value for all stakeholders involved in bringing products and services to market.
  • Today GSCM requires supply chain managers to integrate environmental thinking into each step within the supply chain. That means that they must employ innovative environmental technologies to provide practical solutions to the environmental problems facing the global community.

(Definition) Green Supply Chain is a supply is a supply chain that considers environmental impacts on its operations and takes action along the supply chain to comply with environmental safety regulations and communicate this to customers and partners.

  • Sustainability figures significantly in supply chain management decisions for the following reasons:
    • Government and regulatory pressures.
    • Good environmental management and sustainability concerns.
    • Public opinion and power of consumer choice.
    • Potential for competitive advantage.
  • In addition to adding value, sustainable supply chain management can make good business sense, which can:
    • Drive growth
    • Reduce costs
  • Without forward looking environmental and social policies and supply chain practices, and organization’s reputation may suffer among investment analysts.
  • Supply chains must create three types of values:
    • Financial
    • Customer
    • Social

Financial Value

One method of increasing the financial value is to reduce costs.

Cut cost to yield net gain at the bottom line:

  • Cost cutting needs to aim for net gains at the bottom line.

(Definition) Inventory optimization software is a computer application having the capability of finding optimal inventory strategies and policies related to customer service and return on investment over several echelons of a supply chain.

  • Changes at any one point in the system will create changes elsewhere, therefore changes have to be viewed historically. Supply chain management necessitates cross-functional team work for the lateral chain. If a leaner supply chain can deliver the same customer satisfaction with a great profit, then cost cutting is justified.

It takes money to make money:

  • The end result should be net gain.
  • If an improvement in the supply chain brings in more revenue than the cost of investment, then it is justified.
  • Purchasing automated machinery to improve warehousing, upgrading hardware and software, training managers in team building and other investments may be necessary to build and maintain a competitive supply chain.
  • The ultimate aim must always be for creation of value at the customer’s end of the chain with sufficient profits to satisfy the needs of other stakeholders.
  • Typical measures of success in the use of invested money and assets more generally are:
    • Return on Investment (ROI)
    • Return on Assets (ROA)

(Definition) Return on Investment (ROI) is a relative measure if financial performance that provides a means for comparing various investments by calculating the profits returned during a specified time period.

(Definition) Return on Assets (ROA) is defined as net income for the previous 12 months divided by total assets.

Gains should be equally distributed:

  • Possibly the most common mistake in this regard is to send all cost savings all the way to the consumer’s end of the chain. If all efficiencies are plowed into retail price reductions, the supply chain itself will suffer from lack of financial sustenance.
  • Investors require a competitive return on loans and equity. The maintenance and upgrade to the chain’s infrastructure requires virtually continuous investment.
  • Employees have to be compensated at a competitive arte, trained in new processes and products, and more fundamentally, recognized for their contributions.
  • Teamwork among supply chain entities can create improved value for customers for a net financial gain that is equitably shared by all stake holders.

Customer Value

(Definition) Market Driven is responding to customer needs.

  • The ultimate goal of market-driven supply chain management must always be to deliver products and services that the customer values and of course will pay for.
  • Depending up the market being served, a supply chain may be managed so that it delivers one or more of these values to its end customers:
    • Quality of product or service
    • Affordability
    • Availability Service
    • Sustainability

Social Value

  • Generally a supply chain’s contribution to the society come from three factors:
    • Creating a positive good by delivering socially desirable and useful products or services.
    • Avoiding or reducing negative environmental side effects from extraction, processing and construction.
      (Definition) The Reverse Supply Chain moves items from the consumer back to the producer for repair or disposal.
    • Integrating sustainability into the supply chain.
  • The SCOR model has applicability in sustainable chain management.

Objective 2: Improve Customer Service

(Definition) Customer Service is the ability of a company to address the needs, inquiries and requests from customers.

OR

(Definition) Customer Service is a measure of the delivery of a product to the customer at the time specified.

Fundamental attributes of basic customer service:

  1. Availability is the ability to have the product when it is wanted by a customer.
  2. Operational Performance deals with the time needed to deliver a customer order.
  3. Customer Satisfaction takes into account customer perception, expectations and opinions based on the customer’s experience and knowledge.

Objective 3: Effectively Use System Wide Resources

  • Resources can be in form of employees, raw materials, equipment, etc.
  • Being effective means that supply chain gets the right product and the right amount to the right customer at the right time.

Objective 4: Efficiently Use System Wide Resources

(Definition) Efficiency is a measurement (usually expressed in percentage) of the actual output compared to the standard output expected. It measures how well something is performing relative to existing standards. Efficiency is inward-focused, in that a company looks internally to determine how a supply chain process can be done less expensively, in less time, and with fewer resources.

Efficiency is one of the measures of capacity in a supply chain environment.

Capacity is all about what can be accomplished by employing all the resources in the supply chain network that includes work centers, storage sites, people and equipment.

(Definition) Capacity has few meanings:

  1. The ability of a system to perform its expected function.
  2. The ability of a worker, machine, work center, plant or organization to produce output per time period.
  3. Required mental ability to enter into a contract.

When a supply chain is operating at high efficiency, it means that its utilizing its resources well to produce the level of output in a production plan within the time allowed.

Objective 5: Leverage Partner Strengths

(Definition) A Partnership in a supply chain is a relationship based on trust, shared risk and rewards aimed towards achieving a competitive advantage.

Well-chosen partners will benefit from a high level of mutual trust, respect of each other’s expertise and contributions and shared vision.

A strong and useful partnership will yield a combination of the following as it performs the functions needed by your organization:

  • Adding value to products, such as shorter time to market.
  • Improving market access, such as providing new market channels.
  • Building financial strength through increased income and shared costs.
  • Adding technological strength if there is internal expertise in use of more advanced software and systems.
  • Strengthening operations by lowering systems costs and cycle times.
  • Enhancing strategic growth to break through barriers to new industry and opportunities.
  • Improving organizational skills that facilitate shared learning and insights of both firms’ management and employees.

Supply chain management technologies and practices can help a company select the appropriate sales partners and support them by:

  • Providing timely and accurate information.
  • Helping them deal successfully with channel customers.
  • Aiding them in leveraging their strengths such as innovation, speed, high quality, low costs, etc.