As companies grow and their operations become more complex, they tend to outgrow their existing software.
Expanding business units or segments tend to become more independent over time. This makes interdepartmental communications and resource allocation more difficult as needs morph with growth and changing reporting requirements. Data sharing and process coordination become increasingly cumbersome as the volume of data increases, especially when each department uses different software.
This may lead to inefficiencies, errors, and hindrances to growth.
When this happens, the company needs to step up to more sophisticated software to manage its finances and streamline its operations. It may be time to invest in an ERP system.
What Is an ERP System, and What Does It Do?
An ERP (Enterprise Resource Planning) system is a sophisticated software package that helps organizations manage multiple business functions using a central database and a common interface where all authorized employees can access information in real-time.
Most companies rely on a variety of software for tracking and reporting purposes between their departments. For effective, accurate, and complete reporting, these companies should have software integrations in place that streamline cross-departmental data access. However, these integrations are rarely cheap or easy. Enter ERP.
ERP systems replace the various independent software packages, offering an all-in-one solution for such functions as accounting, human resources, supply chain management, customer relationships, project management, procurement, manufacturing, inventory management, and business analytics. ERP systems are typically modular, meaning that the company can purchase and plug in additional components to handle new needs as they arise.
When an ERP system is in place, each department uses its own subset of functions. The system ties everything together, providing smoother communication and coordination, and presenting a complete real-time company overview to management in one reporting system.
A typical ERP software package may include standard functions such as:
- Corporate governance and performance reporting
- Accounting, finance, and regulatory compliance
- Human resources management
- Sales and marketing optimization
- Procurement and supply chain
- Production and manufacturing
- Distribution, warehouse management, and shipping
- Customerrelationships (CRM)
- Industry-specific modules
What Are the Pros and Cons of Acquiring ERP software?
A properly used ERP system can reduce errors, increase operational efficiency, and prevent excess expenditures. It can help a company keep its various functions in solid synchronization. However, the move to an ERP system can be detrimental if not carefully planned and executed.
Companies often find that an ERP system provides benefits such as the following:
- Reduced operational costs
- Better control of finances and fewer errors
- Improved accessibility and timeliness of information
- Better collaboration between business units
- Operational scalability
- Insightful reports and data analytics
- Data-driven forecasts and better-informed decisions
- Enhanced data security
- Easier regulatory compliance
Many of these benefits take time to achieve, but in the long term, they can be hugely consequential in building a stronger, more profitable enterprise. You can find an interesting list of statistics and survey results from ERP implementers at this link.
ERP systems can be expensive and difficult to implement and maintain. Here are some things to be aware of when considering the acquisition of an ERP system:
- The initial purchase or licensing cost can be high and could exceed the combined costs of your existing systems.
- Most ERP systems require annual maintenance contracts that can also be very expensive.
- It can take a long time (often many weeks or months) to plan, install, and implement an ERP system.
- Company performance and revenue may be negatively impacted during the transition period.
- Migrating data from existing software into the ERP system can be a long and difficult process.
- The learning curve for employees can be steep.
- If the ERP system goes down, everythinggoes down.
- System maintenance and repair requires expert knowledge – usually an outside consultant – and emergency service is very costly.
Things to Consider
Some questions to contemplate are:Does your business have the internal expertise to set up and maintain the system, or will you need to find outside talent? Is this a good time for your company to engage in a costly and time-consuming transition? Is there good reason to believe the long-term benefits will outweigh the short-term drawbacks?
There are over 100 different ERP systems on the market today. Choosing the best system for your company’s needs can be a real challenge. There are general-purpose and industry-specific ERP systems. Systems vary greatly in their ease of use, expandability, flexibility, and availability of support. There are hardware-based and cloud-based ERP systems, open-source and SaaS systems. Pricing models vary greatlyand budget limitations may exclude some options. Making the right choice will take time and research. Assistance from an outside expert may be necessary.
What Should You Look for in an ERP System?
The flow of information is the lifeblood of modern business, and ERP systems are meant to optimize that flow. You should look for an ERP system that helps you solve problems, simplifies your processes, provides better access to information, and improves your company’s bottom line. Here are some things to look for as you make a decision.
A primary consideration when choosing an ERP system is its applicability to your company’s needs. Ideally, you shouldn’t need to purchase a lot of expensive add-on components or pay for components you don’t need. The system’s capabilities also need to align with your industry focus and long-term business goals.
A second consideration is the cost versus benefit. The system needs to add value to your business, not hamper it with unreasonably high expenses. A look at the costs of people resources and their bandwidth vs the cost of the ERP is another decision to be weighed.
If your company has employees who work at home or on the road, it is important to choose a system that allows access over the Internet and supports a variety of devices. Authorized employees should be able to get the information they need whether they are using a desktop computer, laptop, tablet, or smartphone.
Your company’s data is precious and must be well-protected. It may include employees’ personal data, sensitive correspondence, and business secrets. It is essential to find a system that provides strong protection against data leaks and the prying eyes of competitors and bad actors. This is especially true when system access is available over the Internet.
One of the most important aspects of an ERP system is its ability to provide accurate, real-time visibility into all parts of your business. It can help you discover trends and opportunities for optimization. You will want to find a system that generates the reports you need in a format you can easily understand and use.
Ease of Use
Another critical factor is the software’s learning curve and user-friendliness. If possible, let key employees review and try out a demo of the system and offer their feedback. Your transition is likely to be rough if your employees can’t figure out the software or hate using it.
As your company matures, your needs are likely to change. You may need to add or swap out modules, change system parameters, or adjust data storage space. Make sure your system provides the option to scale up or down so that you can adapt to whatever circumstances may arise.
Choosing an ERP system also involves evaluating the company that produces or supports it. You probably want to deal with a company that is stable, has a good track record and high customer ratings, and offers great customer service. You need to be confident that you can get quick, competent support when you need it.
Tips for Choosing an ERP System
An ERP system is a significant long-term investment that can affect every aspect of your business, so choose it carefully. Make sure it meets the needs of every department as well as your overall company objectives. Look for a system that will help you increase both efficiency and profitability.
1. Know What You Want to Achieve
Consider your company’s current weaknesses and areas you want to improve. Make sure the ERP system you choose has the capability to help you increase your performance in these areas.
For instance, if your current accounting system is unable to provide the reports you need in a timely manner, one of your requirements might be a comprehensive real-time view of the company’s financial picture. If you are losing money due to excess inventory, one requirement might be strong inventory management capability.
In choosing your ERP system, it is important to consider the cost and difficulty of customizing the software. You should try to find a package that handles as many of your needs as possible with minimal customization requirements. Remember that the more customization you do, the greater the likelihood of problems and the need for maintenance.
2. Plan Your Budget
Obtaining an ERP system is a significant financial commitment. The initial costs can be very high, both in money and in labor. In addition, the transition period is likely to be lengthy, difficult, and disruptive to your business. Be sure your budget can handle these direct and indirect costs. Plan for some budget flexibility in case there are unexpected complications.
Longer term, the expenses are easier to forecast. Be sure to consider emergency maintenance expenses. ERP systems are notoriously prone to hiccups when updates and security patches are applied because so many different components and customizations are involved.
3. Involve Your Staff Early
Many, if not most, of your employees will be affected by the implementation of a new ERP system. For some, their entire way of working will change. It can be beneficial to include key players in the decision-making process for choosing an ERP system. This may help to increase buy-in and resolve potential push-back or concerns before the implementation period.
It is essential to have a strong ERP manager who can handle day-to-day operations, manage customizations and updates, train users, and answer questions. In many companies, this is a full-time job for one or more individuals. You will need to hire, train, or contract with someone to fill this role, and it should be done as early as possible. You will also need sufficiently trained IT resources to keep the system running and fix problems.
4. Seek External Support
Most companies can benefit greatly from outside consultation when choosing and implementing an ERP system. Poor planning can result in implementation delays, cost overruns, and unsatisfactory system performance. You should involve someone who has good experience with the ERP platform you plan to implement and knows the needs and operational practices of your business.
You should make sure you have a solid maintenance agreement either with the supplier of the ERP software or with a knowledgeable and reliable third party.
An external advisor who has experience with ERP systems in many companies can help you implement the software smoothly, adapt it to your needs, and avoid pitfalls.
An ERP system can consolidate many functions of your business into a single platform, thus improving communication, efficiency, interdepartmental cooperation, and ultimately your bottom line. It can be essential to implement ERP if your business is growing out of its current software capabilities. But selecting and implementing an ERP system is no trifling matter. It requires a great deal of planning, preparation, training, and careful implementation. Because the ERP system will affect every area of your business, it is important to be prudent and careful as you proceed. If you would like help in this process, we invite you to contact Preferred CFO.
About the Author
Curtis is an experienced finance professional with 20 years of experience serving public and private companies in a variety of industries including SaaS, healthcare, and manufacturing.
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