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Enterprise Resource Planning (ERP):

From traditional methods of manual Bookkeeping andprocessing of Financial Accounting Information by

Financial Accountants, Financial Accounting has

evolved today to leverage the manifold benefits ofDigital Computing. Enterprise Resource Planning

(ERP) System is a new age model of Financial

Accounting Information System, which capturesorganization wide data and generates Financial

Statements and Reports based on real time activity.

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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 dataand 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.

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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.

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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 thesoftware, as well as deploying a dedicated team of IT

personnel across locations for its maintenance, can prove to

be very expensive.

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ECONOMIC VALUE ADDED (EVA)

Concept of EVA

Traditional approaches to measuring shareholders valuecreation 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 isimportant. 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.

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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 andshareholders; and

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

capital employed

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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 generatingoperating 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.

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Utilities i) EVAPresents 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., whileoperational 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 shareholderswealth, through integrating EVA framework in four areas, viz., to

measuring business performance, guiding managerial decision-

making, aligning managerial incentives with shareholder interests

and improving the financial and business literacy throughout the

organization