Sales Planning and Profit Margin Calculation in Profitability Segment

[Former Member]

1.       1. Introduction

Profitability segment is a management reporting tool. It helps management to take decision on the basis of different reports provided by COPA and help to improve the performance of the company by identifying the weakness and strengths. Sales planning is an important part of Controlling, it help the management to forecast the expected sales of next financial year based on the different financial module or through trend analysis. This further leads to production planning, raw material planning, and manufacturing activity planning. The second important part is the profit margin calculation. It indicates the profitability of different product. Profit margin is the difference between “Sales Revenue” and “Cost of goods sold”. With the help of Gross margin calculation we can identify which products are more profitability to the company and accordingly the management can decide which product to manufacture more to improve bottom line of the organization. 

COPA provide the functionality to analyze the profit at very minute details, in other words at it provide the functionality to analyze the profitability at multiple characteristic. For example, if we want to analyze profitability of a particular product in a specific geographical region from a specific customer, it can be done with the help of COPA. The reports of COPA provide a better and in-depth analysis of profitability, which leads to identify the weakness, whether the problem is coming from a particular material or a customer or from a specific geographical region.  In this document I will be focusing on how we can do sales planning and gross margin calculation in COPA at different characteristic.      

2.       2. Sales Planning

Sales planning in an integrated business process, which help to predict the sales for next financial year on the basis of historical data and past trend. It start with current sales for a product in a given market region and forecasting the future sales of same product in the same region based on the trend in the organization or in industry. For example, if the organization is seeing the five percentage growth on an average from last 5 to 7 years, then we can say that the next year the growth will continue and the next year sales plan will be five percentages higher than the current year’s sales. Deciding the trend or factor of growth in sales is a management decision, but if we talk about SAP, it provides the functionality to predict the sales through standard ratio formula. Here we can define and maintain the standard ratio which helps to predict the sales plan for next year based on either the plan data of previous period or actual data of last financial year, but forecast COPA has one limitation that the ration will be applicable throughout the entire financial year on all the products which may not be practically possible that all the products are seeing same growth rate for whole financial year as there may be some products which may be season in natural and which demand depend upon a specific period or happening of a certain event. For a better decision making the growth should be based on product category or customer and it should not be applied on all the products at the same rate, it may be possible that some product are high value products but less frequent in market while other are less value with high frequency. So the growth rate should be applied based on product category and for that same plan forecast should be done outside COPA and uploaded directly into COPA for further valuation of cost of goods sold. In this case study I will do the same. I will upload the sales plan for a specific product in COPA and then perform the cost of goods sold calculation to get the profit margin.      

3.       3. Profit margin calculation

Prediction of Gross profit is most important from the management point of view. It indicates the profitability of any product. It is not necessary that a product having higher selling price may be higher profitable and on the same way a product with lower selling price per unit may be lower profitable. For a better decision making we need to take the profitability into account for decision making, but not the sales price. 

In SAP we can do the profit planning directly in COPA. Here we can combine the standard cost of finished goods to sales to get the profitability. Standard cost calculation is done in Product costing in Controlling, which can be link to COPA by linking costing variant to costing key and/ or be defining costing sheet in COPA. As a result the cost of finished goods can be linked from Product costing to COPA and then which can be used for the purpose of profit margin calculation.

For calculating profitability in COPA we need to use Valuation method to apply the cost of finished goods to revenue, which leads to calculation of profitability at different characteristic in COPA      

4.       4. Advantage of using COPA for sales planning

•           COPA is a management decision making tools, which provides various reports to evaluate the performance of organization at minute characteristic level.
• It helps to predict profitability at different characteristic like; we can check profitability in a company in a specific region from a specific customer for a specific material.
• The minutes detail helps in better decision making
• COPA received the data from differ modules, like actual sales quantity from SD, cost from Controlling, non-productive expenses from Finance, production variance from Product costing etc.

5.       5. Configuration required

5.      5.1. Planning Versions

          Controlling --> General Controlling --> Organization --> Maintain versions (OKEQN)

Versions represent a pull which includes plan or actual data in SAP. While planning in COPA, versions basically represent plan scenarios based on different planning assumptions. That means for planning in COPA we can maintain different versions based on assumptions used in planning.

Generally version “000” holds all the actual posting from Finance and other modules. For recording actual date it’s always advisable to keep only version “000” i.e. if we create any specific version for COPA planning then activate only “Plan” in that version, as specified in the below screen. 

Once a new planning version is created, we can assign planning version to operating concern. While assigning to operating concern, we need to define the below details

• Exchange rate type: exchange rate the system will check for the purpose of calculation and
• Currency type: here we define in which currency the data will be stored in version.      

5.     5.2. Setup of condition and costing sheet

     Controlling --> Profitability Analysis --> Master Data --> Valuation --> Set Up Conditions and Costing Sheets --> Create Condition Types and Costing Sheets (8KEV)

In COPA we can define condition and costing sheet to calculate different cost or revenue component. It help to calculate or predict values,  based on some other factor like “Sales Quantity” or “Sales revenue” or “Cost of materials” etc, which are important for analyzing contribution margin. These values are not known at the time of original document posted, for example the values which can be derived from condition and costing sheet are cash discount, sales commissions, freight costs etc.   

For the purpose of this article I am not creating any condition or costing sheet. I will be using “Valuation using material cost estimate” to consider all cost component of a product cost from cost estimate maintained in Product Cost Controlling.

5      5.3. Setup of Valuation using Material cost estimate

Controlling --> Profitability Analysis --> Master Data --> Valuation --> Set Up Valuation Using Material Cost Estimate --> Define Access to Standard Cost Estimates(KE40)

In COPA we can calculate value of a sales document by combining cost of goods manufactured in the material cost estimate from Product cost Controlling. For doing this we need to define “Costing key”. A costing key need to be linked to a costing variant, which represent material cost estimate in Controlling.

While defining a Costing key, we need to define:

·        a.  Which cost estimate the system should read from Product Cost Planning (by linking Costing variant to Costing key)

·         b. Which period should be consider for considering the cost estimate

Once we define the costing key, we can link it with to a product or material type. Then for that particular material or product the same costing key will be consider for cost calculation or alternative we should not assign costing key to any specific material type then same costing key will be used for all the material which cost estimate.

In the above screen, I have assigned costing variant “PPC1” to costing key “BBB”. Costing key BBB will look for a released standard cost estimate for material at the time of cost estimate in COPA and if there will be no released cost estimate then system will give error message as “No Cost estimate found”. 

5.     5.4. Define and assign Valuation Strategy

          Controlling --> Profitability Analysis --> Master Data --> Valuation --> Valuation Strategies --> Define and Assign Valuation Strategy (KE4U)

Valuation strategy represents the method used for calculating value of value fields in COPA. It determines the different values based on the rule specified in valuation strategy.  For this case study I am defining the valuation strategy “BBB” for Annual Sales Budget, for which I have activated “material cost estimate” that will consider sales volume as quantity fields and assigned plan version “GGG” to valuation strategy “BBB” for manual and automatic planning. 

5.     5.5. Assign Value Fields:

Controlling --> Profitability Analysis --> Master Data --> Valuation --> Set up valuation using material cost estimate --> Assign Value fields (KE4R)

Here we can assign the components of cost component structure from controlling to respective value fields of operating concern. This assignment is necessary as in Costing based COPA, a value field represent groups of cost element. For getting the cost from cost estimate through costing key we need to assign all the cost component to respective value fields otherwise data in COPA will be incomparable and we will get the errors while executing valuation in COPA.   

5.     5.6. Assign Quantity Fields:

Controlling --> Profitability Analysis --> Planning --> Initial Steps --> Assign Quantity Fields (KE4M)

Quantity fields are used in Sales and Distribution, which need to be assigned to Value filed in COPA. Here we need to assign all the value filed that we want to transfer from SD module to COPA. We can transfer billing quantity COPA using the using the sales unit or stock keeping unit. This assignment will be valid for both plan and actual data in COPA. For planning it helps the system to automatically derive the sales quantity for manual plan for individual products. 

5.     5.7. Initial Planning steps

At this step we define the structure for each company code or sale organization that needs to be used for the purpose of Sales and Revenue planning. (Transaction: KEPM)

a.       Define Planning Levels

A planning level basically represents combination of different planning packages. It the highest point in planning step in COPA. In planning level we need to define Planning packages. Planning can’t be executed at planning level. Here we need to assign the characteristic which we want to use for the purpose of sales and revenue planning.

b.      Define Planning Packages

Planning package basically represent a sub-part of planning level. In planning package all the characteristics are defined. For example for which company code and for which period we want to do the sales planning, need to be defined in planning package. Planning methods would be executed only in planning packages, not in planning level.  

c.       Define Planning Methods

Planning methods represent the different methods of provided by COPA, which can be used for the purpose of Sales plan. It includes the major methods like:

·         a. Enter Planning data: here we can define manual sales plan data

·         b. Display planning data: it display the manual sales plan data entered in planning package.

·         c. Forecast: it helps to forecast the sales plan on the basis of actual data of last financial year or plan data of specific period.

·         d. Valuation: in valuation we need to define the valuation strategy to execute cost estimate.

·         e. Delete: it helps to delete the plan data entered in planning packages.

There are others planning packages that can be used. But for this article enter planning data and then valuation. 

d.      Enter Planning data

For the purpose of testing I have maintained Sales plan for one material in enter planning data method. The details can be viewed from below. Here the planning has been maintained at characteristic like Co. area, Company code, Period, Customer, Product & Profit center. After completing the valuation in COPA, if we want to analyze the profitability of the company we can do that at any combination of characteristics specified.  

e.      Valuation

In valuation assign the valuation strategy created for planning version “GGG”. Here we are using cost estimate from costing key, which is linked to costing variant. After assigning the valuation strategy execute the value.

Execute valuation:

If didn’t received any error message that means valuation has been completed and the profit margin has been calculated.

6.       6. KE30 Report:

Now the sales plan and profit margin can be viewed from COPA report. Like KE24 or KE30. The cost of goods manufactured can be cross verified from Product costing (CK13N). For the purpose of showing the result I have created a report in COPA so that result can be cross verified. Here in the below screen short we can see the profitability of material and the cost of material is coming from CK13N for cost estimate.

7.       7. Conclusion

As COPA provide the functionality to analyze the profit at very minute details, first of all we need to plan the Sales figures at different characteristics specified in Planning package and then functionality of COPA can be used to analyze profitability at multiple characteristic. For example, if we want to analyze profitability of a particular product in a specific geographical region from a specific customer, it can be done with the help of COPA. The reports of COPA provide a better and in-depth analysis of profitability, which leads to identify the weakness, whether the problem is coming from a particular material or a customer or from a specific geographical region. With the help of this document, I have tried to explain how we can do sales planning and profit margin in COPA. Here the example has been given for one material to explain how the scenario works. This can be applied on all materials and used for better decision making.