Enterprise Resource Planning (ERP):

From traditional methods of manual Bookkeeping and processing of Financial Accounting Information by Financial Accountants, Financial Accounting has evolved today to leverage the manifold benefits of Digital Computing. Enterprise Resource Planning (ERP) System is a new age model of Financial Accounting Information System, which captures organization wide data and generates Financial Statements and Reports based on real time activity.

An ERP system is made up of key components which make up a large organization, such as Sales and Marketing, Manufacturing and Logistics, Transactional System, Customer Relationship Management, Supply Chain Management, Warehouse Management, Human Resource Management, Financial Accounting, Quality Assurance and the Management Console. The ERP software system is deployed organization wide, where employees from different functions access their respective component and feed in data on a real time basis. These software components are hosted centrally by the main processing modules, which have access to all data and is capable of processing information and generating reports real time. This automation saves Financial Accountants the monotonous work, however though they do inspect the transaction records and manage conflicts daily.

Financial Accounting Statements and Reports are generated instantly out of the system. Financial Accountants have better predictability about information being processed and conflicts are pointed out by the software, with possible corrective options. Financial Accountants also have flexibility in adjusting the software behavior, to favor different Financial Accounting approaches and calculation methods. Management Accounting Reports are also generated real time as part of the ERP Decision Support System, which gives leadership and management better flexibility and advantage in committing healthy operational decisions.

ERP software systems are very expensive and most organizations cannot afford them. ERP is built upon a standard presumed organizational model with limited software customization and therefore some large organizations cannot fit in their dispersed model within the software. When ERP is implemented spanning the organizations global operations, conducting training sessions for employees to operate the software, as well as deploying a dedicated team of IT personnel across locations for its maintenance, can prove to be very expensive.

ECONOMIC VALUE ADDED (EVA)

Concept of EVA Traditional approaches to measuring shareholders value creation have used parameters such as earning capitalisation. Market capitalisation and present value of estimated future cash flow. Extensive equity research has now established that it is not earnings per se, but value which is important. A new measure called EVA is increasingly being applied to understand and evaluate financial performance. EVA is a residual measure of financial performance. It may be defined as the operating profit after tax less the charge for the capital both equity as well as debt used in the business. This measures is being increasingly used by AAA companies like Hindustan Lever Ltd.

The concept of EVA can be described as under: EVA = Net Operating Profit after Tax (NOPAT) Cost of Capital Employed (COCE) Where,

NOPAT = Profits after depreciation and taxes but before interest costs.
NOPAT thus represents the total pool of profits available on an ungeared basis to provide a return on lenders and shareholders; and

COCE = Waited average cost of Capital (WACC) x Average capital employed

What does EVA show? EVA is residual income after charging the company for the cost of capital provided by lenders and shareholders. It represents the value added to the shareholders by generating operating profits in excess of the cost of capital employed in the business. When will EVA increase? EVA will increase if: a) Operating profits can be made to grow without employing more capital, i.e., greater efficiency. b) Additional capital is invested in projects that return more than the cost of obtaining new capital, i.e., profitable growth. c) Capital is curtailed in activities that do not cover the cost of capital, i.e., liquidate unproductive capital.

Utilities
i) EVA Presents the value added to the shareholders by generating operating profits over and above the cost of capital employed in the business. Hence it is a measure of financial performance of the company. ii) EVA is a management tool that discloses the impact of both strategic as well as operational decisions of the management. The examples of strategic decisions are: what investment to make, which business to exit, which financial structure is optimal, etc., while operational decisions include, whether to make in house or out source, repair or replace equipment or, make short or long production runs, etc. iii) EVA cam prove as an effective tool for increasing shareholders wealth, through integrating EVA framework in four areas, viz., to measuring business performance, guiding managerial decisionmaking, aligning managerial incentives with shareholder interests and improving the financial and business literacy throughout the organization