When I was picking up Project systems skills, Results Analysis was one of my challenging areas to understand. In this document, I try to explain RA in a simpler manner with Professional services scenario.
Why Results Analysis?
In any customer projects with more lead time (at least 3 months), RA plays an important role. Results Analysis is to valuate ongoing unfinished activities, in projects during period-end.
If you look at profit and loss of such ongoing unfinished activities, you will see costs only and therefore your P&L shows loss. If you look at this in the period-end, the project’s ongoing activities will have an unfavorable effect on the company’s results. Accurate, timely recognition of project profitability, for each project, for every period end, is very important in any company.
SAP Results Analysis is used to show a more realistic view of your ongoing activities by capitalizing the value added so far in the balance sheet.
How to capitalize?
SAP has supplied fifteen RA methods as standard. Results analysis methods contain the rule for calculating the results analysis data. These methods will help you to capitalize the costs/revenue.
Professional Services Scenario:
Consulting, audit & tax, legal, and IT services businesses use professional services scenario in SAP. This would efficiently manage people, client relationships, maximize resource utilization, improve project and operational efficiency, drive profitability and adhere to government regulatory requirements.
Method 3 - Cost based Percentage of Completion (POC) method:
In this document we will look into Method 3 - Cost based Percentage of Completion (POC) method. This method is primarily used in large customer projects and is used to capitalize revenue instead of costs. With this method, you assume that the costs incurred to a project will lead to an amount of revenue equal to the costs. For example, if you realize 15% of your percentage of completion, you will capitalize 15% of your planned revenue. This enables you to report a profit before any revenue has actually been received. Some countries will not allow unrealized profits to be reported. Legal requirements in different countries stipulate that unrealized profits can be capitalized or that they cannot be capitalized.
How RA Method - 03 works?
The following are the parameters used to calculate:
1. Planned Revenue
2. Actual Revenue
3. Planned Costs
4. Actual Costs
1. Calculated Costs (Cost of Sales)
2. Calculated Revenue
3. Revenue Surplus (Reserves for unrealized costs). ( In SD Revenue Recognition term this is called Deferred Revenue)
4. Revenue in Excess Billing (Capitalized costs (WIP)). (In SD Revenue Recognition term this is called Unbilled receivables)
In this method, system has to calculate Percentage of Completion (POC) based on planned costs and Actual costs.
Percentage of Completion (POC) = Actual Costs / Planned Costs
1. Calculated Costs = POC X Planned costs
= (Actual costs / Planned Costs) X Planned Costs
= Actual costs
Therefore, in this method, Calculated Costs (Cost of sales) will be always Actual Costs.
2. Calculated Revenue = POC X Planned Revenue
= (Actual Costs / Planned Costs) X Planned Revenue
If Actual Revenue > Calculated Revenue
System creates Revenue Surplus
3. Revenue Surplus = Actual Revenue – Calculated Revenue
If Actual Revenue < Calculated Revenue
System creates Revenue in Excess Billing
4. Revenue in Excess Billing = Calculated Revenue – Actual Revenue
Now let us take an Example. I have taken a happy path where there is no loss in the project.
A project with sales contract is created with planned revenue $ 100. You plan labor and service costs in the project for $80. Assume, the project will have lead time of 4 months (periods).
In the first period, few services are done to the project and therefore the actual costs $20 incurred in the project. No invoice is raised to the customer.
In the period 2, you send an invoice of $40 to your customer and also your actual costs in the project increased to $40.
In the period 3, you send another invoice of $40 to your customer and actual costs increased to $60.
In period 4, you complete the project technically. Total actual costs incurred is $80 and total invoiced amount is $100.
Based on this method, you can learn other methods easily. Hope, I have explained you simply.