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Which customers are particularly profitable? Which products generate the highest margins? How do production variances affect our results? And how does our margin develop if we take current customer orders into account in addition to revenue that has already been invoiced?
For questions like these, SAP S/4HANA offers Margin Analysis, a powerful form of profitability and market segment analysis.
Margin Analysis is the further development of the account-based profitability analysis CO-PA known from SAP ECC (see the blog article Costing-based vs. account-based CO-PA in SAP S/4HANA). With SAP S/4HANA, SAP has significantly expanded its functionality. Many functions that were previously associated primarily with costing-based profitability analysis can now also be implemented using Margin Analysis.
In this article, we explain the possibilities offered by Margin Analysis, how individual requirements for profitability analysis can be mapped, and what companies should consider when designing their solution.
What is Margin Analysis in SAP S/4HANA?
Margin Analysis enables revenues and costs to be assigned to different market segments, allowing profitability to be analysed from various perspectives.
Typical questions include:
- How profitable are individual customers or customer groups?
- Which products or product groups generate the highest contribution margins?
- How do margins differ between regions or sales organisations?
- Which cost components affect our margin?
- How do production variances affect our results?
A key advantage of SAP S/4HANA is the close integration of Financial Accounting and Controlling. Margin Analysis is based on data from the Universal Journal. Financial and profitability information can therefore be analysed on a common data basis.
For companies, this means that profitability analysis is more closely integrated with Financial Accounting while also allowing additional information to be incorporated into management reporting.
Margin Analysis or Costing-Based CO-PA?
In SAP ECC, companies often had to choose between account-based and costing-based profitability analysis.
For a long time, one of the key advantages of costing-based profitability analysis was its extensive range of functions. These included, for example, the presentation of costing-based cost components, the breakdown of production costs and the detailed analysis of production variances.
With SAP S/4HANA, SAP has significantly enhanced account-based profitability analysis and repositioned it under the name Margin Analysis. Functions that were previously often considered an argument in favour of costing-based CO-PA are now also available in the context of Margin Analysis.
This makes Margin Analysis a strategically interesting solution for profitability analysis for many companies using SAP S/4HANA.
Nevertheless, the decision on which option is appropriate in a specific case should not be based solely on individual functions. Key factors include existing reporting requirements, the current CO-PA structure and the future S/4HANA architecture.
What possibilities does Margin Analysis offer?
Margin Analysis goes far beyond a simple comparison of revenues and costs. Various functions make it possible to gain greater transparency into the actual drivers of a margin.
Analyse Cost of Sales in greater Detail
For a meaningful margin analysis, it is often not sufficient to know only the total cost of sales for a product.
The more interesting question is:
What are these costs made up of?
By breaking down the cost of sales, different components of production costs can, for example, be presented separately. This makes it easier to understand in reporting which cost components are responsible for changes in the margin.
This gives Controlling a more differentiated view of the profitability of products and market segments.
Making Production Variances Transparent
Production variances can also have a significant impact on actual profitability.
SAP S/4HANA enables production variances to be mapped in detail in Margin Analysis. Instead of looking only at an overall amount, different causes such as price, quantity or lot-size variances can be analysed.
This makes it possible to identify not only that a product’s margin deviates from the plan, but also why.
Individual Characteristics: When Customer and Product are not enough
Requirements for profitability analysis vary from company to company.
Standard characteristics such as customer, product or sales organisation do not necessarily cover all the perspectives from which management wants to analyse profitability.
You may want to analyse your margins additionally by
- customer segments,
- product groups,
- sales regions,
- brands,
- strategic business areas, or
- other company-specific dimensions.
SAP S/4HANA provides the option to extend Margin Analysis with such individual characteristics.
Do we need a new Characteristic at all?
Not every additional reporting dimension automatically requires a new characteristic. First, you should check whether the required information is already available in the SAP standard or can be derived for the analysis from existing information.
Only if the information is genuinely required in addition and, where applicable, needs to be stored on the business transaction does the question arise as to which extension approach is appropriate.
One example: A company wants to analyse its margins by a specific customer segment in the future. It is then not only necessary to clarify how the corresponding characteristic should be created in SAP. It is equally important to determine where the customer segment comes from, in which processes it is required and whether the value valid at the time of posting should also be retained for subsequent historical analyses.
These business-related questions have a direct impact on how the characteristic should be implemented in SAP S/4HANA.
Creating new Characteristics in S/4HANA: The Approach has changed
Those coming from SAP ECC will be familiar with transaction KEA5 as the primary way of creating customer-specific CO-PA characteristics. In SAP S/4HANA Private Cloud, however, the approach has changed.
In addition to this traditional method, more modern extensibility options are now available, offering advantages particularly in terms of Clean Core, FIORI and Embedded Analytics.
Before creating a new characteristic, you should also check whether SAP already provides the required information as a standard characteristic. If this is the case, the existing characteristic can be used and a customer-specific extension is not necessary.
If a new characteristic is actually required, there are three basic options:
- Custom Fields App – the preferred approach for new characteristics
For many new requirements, the Custom Fields App is now the preferred approach. The new field is created in the business context “Accounting: Market Segment” and then published for the required applications and analytical scenarios.
The key advantage is that the characteristic fits into the S/4HANA extensibility concept and can be made available for relevant FIORI interfaces, analytical applications and interfaces.
Especially if companies are increasingly relying on FIORI and Embedded Analytics, this approach should therefore be considered first.
- SCFD_EUI – when existing SAP structures are to be used
A second option is to extend the system using SCFD_EUI. This approach is particularly interesting if the new characteristic is to be based on existing SAP data elements or tables.
The field is first created as a technical extension and then enabled for the “Market Segment” business context. This also allows it to be integrated into the S/4HANA extensibility environment and, for example, made available for analytical applications.
This approach offers additional flexibility, but requires greater technical intervention than creating the field via the Custom Fields App.
- KEA5 – the traditional approach remains available for special cases
The KEA5 transaction known from classic CO-PA is still available. However, it is no longer automatically the first choice when a new characteristic is required in Margin Analysis.
KEA5 remains particularly relevant for certain special cases, such as combined characteristics, specific product hierarchy characteristics or specialised technical requirements.
An important difference becomes apparent in reporting: Characteristics created via KEA5 are not automatically available as an additional dimension in CDS-based FIORI applications. Further technical extensions are therefore required to integrate them into the relevant reports.
For new requirements, it should therefore first be assessed whether the Custom Fields App or SCFD_EUI is the more suitable and future-proof solution.
Which Approach is right?
Which of the three options is appropriate depends not only on how a characteristic can technically be created. What matters is where the information comes from, in which business processes it is required and how it is to be analysed later.
The decision should therefore be made at an early stage. It affects not only Margin Analysis itself, but also, among other things, integration with FIORI and Embedded Analytics as well as the subsequent maintenance and enhancement effort.
Regardless of the approach chosen, it must then be ensured that the new characteristic is reliably populated in the relevant business transactions. For this purpose, the familiar CO-PA characteristic derivation (KEDR) can still be used, for example.
Statistical SD Conditions in Margin Analysis
Not all costs relevant to margin analysis are necessarily recorded as conventional Financial Accounting postings. One example is statistical conditions in Sales and Distribution. They can be used, for instance, to include costing-based cost components in the sales process.
SAP S/4HANA provides the option of transferring relevant statistical conditions from Sales and Distribution to Margin Analysis, thereby supplementing reporting with additional information. This makes it possible to incorporate additional factors influencing the margin into the analysis.
Analysing future Margins with Predictive Accounting
Traditional profitability analyses mainly focus on business transactions that have already been realised. For business management purposes, however, it is often also relevant to understand what is likely to happen in the coming weeks or months.
This is where Predictive Accounting comes in. Based on a customer order, future business transactions such as goods issue and billing can already be simulated. The resulting revenues, cost of sales and margins are then available for analytical evaluation.
This enables controllers, for example, to examine: How could our margin develop by the end of the current month or quarter if the existing customer orders are realised as planned?
As soon as the actual business transactions take place, the simulated values are replaced accordingly by the actual postings.
Predictive Accounting therefore extends Margin Analysis beyond a purely retrospective view by adding a forward-looking perspective.
Reporting: From Market Segments to Product Profitability
A powerful profitability analysis only delivers value when combined with appropriate reporting.
SAP S/4HANA offers various options for this purpose. In addition to the profitability reports known from the traditional CO-PA environment, various analytical FIORI apps are available.
Product Profitability
Product profitability can be used to analyse the contribution margins of individual products. Product information and profitability characteristics can be combined for this purpose.
The ability to analyse costs in greater detail is particularly useful, as it provides greater transparency into the composition of the product margin.
Margin Analysis Line Items
For detailed analyses, relevant accounting documents can be examined down to the line-item level.
Controllers can filter, sort and group items according to different criteria and, where required, navigate to further information or related applications. This makes it possible to analyse everything from an aggregated key figure down to the underlying business transaction.
Market Segments
Market segment analysis enables a flexible analysis of actual and plan data based on different combinations of characteristics.
This is also where the benefits of a well-designed characteristic structure become apparent: The better the relevant management dimensions are represented in the system, the more precisely controllers can analyse profitability from different perspectives.
Margin Analysis is more than a technical Change
With SAP S/4HANA, SAP has significantly expanded the capabilities of account-based profitability analysis. The Universal Journal, FIORI-based analyses, Predictive Accounting and custom characteristics open up new possibilities for analysing a company’s profitability transparently.
However, the decisive factor for success is not the number of functions used. Much more important is the question:
What Information does your Company need to effectively manage its Margins?
An S/4HANA transformation in particular provides an opportunity not only to technically migrate existing CO-PA structures, but also to critically reassess them: Which characteristics will be needed in the future? Which information should be available in the Universal Journal? And what should future profitability reporting look like?
Answering these questions at an early stage creates the basis for a Margin Analysis solution that not only works from a technical perspective, but also delivers genuine added value for Controlling and business management.
Would you like to optimise your margin analysis in SAP S/4HANA?
Whether it’s an S/4HANA conversion, a greenfield implementation or the further development of an existing Margin Analysis system: PIKON supports you in analysing your requirements for profit and loss accounting, characteristic structure and reporting, and in developing a suitable solution for your business based on these findings.
Please feel free to get in touch. Together, we’ll explore how you can make the most of the opportunities offered by Margin Analysis for your business management.
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2 thoughts on “Margin Analysis in SAP S/4HANA: Analysing Profitability transparently”
Hi,
Great blog. I really liked it.
Just wondering if you have any references to handling apportionment of COGS & manufacturing deviations?
-Phil
Hello Phil,
thank you for your feedback!
What kind of references are you looking for? Do you need sources on how to implement it in the system or something else? For more details i can also recommend the official SAP Documentation (https://help.sap.com/docs/SAP_S4HANA_ON-PREMISE/5e23dc8fe9be4fd496f8ab556667ea05/2dd0c7548342b109e10000000a423f68.html?locale=en-US)
Best regards
-Mike