Effective management of a business in today’s world requires Chief Financial Officers (CFOs) to have clear visibility across the entire organization. Enterprise Resource Planning (ERP) software delivers a foundation for that visibility, provided that companies have all the right tools in place to maximize the value they get from those systems. When it’s chosen wisely and implemented correctly, ERP software solves some of the most difficult challenges today’s organizations face.
Companies use ERP software to manage a wide range of business processes within a single, comprehensive system, beginning with core financial capabilities such as managing accounts payable, accounts receivable, and general ledger. But ERP goes far beyond those basic accounting functions, to include things like sales order management, purchasing and procurement, inventory management and optimization, warehouse operations, production planning, and much more.
While smaller organizations may be able to get away with a mix of accounting software and specialized applications for billing or customer management, businesses that grow beyond a certain size need a more holistic approach to manage the complexity that comes with growth. One of the key benefits of ERP software is that it combines a wide range of business processes and information in one place, providing a clear and consistent view of the business.
Here are five of the biggest challenges faced by today’s organizations, and the ways in which ERP helps them tackle those problems.
Challenge #1. Working Capital Is Wasting Away
A common complaint among CFOs is that too much of their working capital is tied up in inventory and accounts receivable. For many organizations, 2020 has prompted a renewed focus on cash, as credit lines have tightened and revenue has become less predictable.
ERP systems handle inventory management, purchasing, receivables, and cash management all under one roof. That provides greater visibility to inventory, including its location, which items are moving quickly, and which ones are sitting on the shelf.
Accounts receivable, likewise, often ties up significant amounts of cash, particularly when the business cycle slows down, and customers delay payment. A modern ERP system helps businesses stay on top of collections, shortening the payment cycle, reducing days sales outstanding, and diminishing the risk of bad debts.
ERP also provides greater control over accounts payable, which further supports improved cash flow.
With better visibility to some of these key levers impacting working capital, organizations can operate more efficiently and ensure healthy cash flow.
Challenge #2. Revenue Is Lagging
ERP supports growth, whereas accounting-only software systems generally don’t provide for the needs of growing businesses.
Very often, large customers are the drivers of technical requirements. Big-box stores, for example, may need products to include barcodes, or may require EDI integration. Modern ERP systems can do that. They also integrate with external service providers, e-commerce platforms, shipping companies, and more.
Many first-time ERP buyers are small companies experiencing high rates of growth. Companies running QuickBooks, Peachtree, or a similar small business accounting packages will quickly reach a point at which those systems can no longer meet their needs. Typically, those companies outgrow the limited inventory management functionality available in small business accounting software, or they need increased customization and integration capabilities.
When a company is positioned to grow beyond a certain point, its ability to effectively manage information becomes critical to its continued success. ERP software puts all the organization’s critical information in one place, providing a comprehensive picture of the business in which all of the moving parts are interacting seamlessly together.
Challenge #3. Inefficiency Drains Profitability
Modern ERP systems are designed to help companies operate at peak efficiency. There are many cases in which the increases in efficiency are obvious. Material requirements planning (MRP), for example, helps manufacturing companies become more efficient by calculating the quantity of raw materials needed to meet production targets, which, in turn, must be sufficient to meet customer demand. MRP requires some complex formulas surrounding demand and capacity, detailed bills of material, inventory on hand, and shipments in transit. ERP systems manage all the various components of that formula, making it possible to generate accurate production plans while maintaining inventory at optimal levels.
ERP drives efficiencies in many other ways as well. Complex organizations often institute approval processes for large purchases, expense reports, and other outgoing payments. By designing approval workflow processes within the ERP software, system administrators can automate many of the tasks that once needed human oversight.
Self-service portals for vendors, customers, and employees make it possible to automate many of the tasks that previously required personal interaction.
Integration with e-commerce platforms, procurement systems, and third-party service providers brings automation and accuracy to a wide range of business processes that once needed significant time and energy.
There are far too many other examples to list here. ERP’s capacity for integration and customization makes it ideal for companies to automate processes and increase efficiency, so the list of possibilities is virtually endless.
Challenge #4. Risk and Compliance Is a Perpetual Worry
Compliance and risk management play an increasingly important role in running businesses of all sizes. Tax compliance, for example, is largely automated in today’s world. Paper-based filings of sales and use taxes or IRS 1099 forms are increasingly rare, as most businesses are now filing online (either by choice or because of government mandates).
Tax calculations can be especially complex in many cases, and the penalties for getting it wrong can be stiff. Most modern ERP systems integrate with tax compliance vendors that specialize in dealing with the complexities of sales and use taxes, for example.
Privacy regulations have also become increasingly important in recent years. The European Union’s General Data Protection Regulation (GDPR) states that companies must delete customers’ personal information from their software systems upon request. Stiff penalties may be imposed for non-compliance. Other jurisdictions have enacted similar legislation, which will ultimately require all businesses to conform to new privacy requirements. Newer ERP systems have added this capability, whereas it is not available in older, outdated software.
Internal controls are essential to any business because they safeguard the company against theft and fraud. Modern ERP systems enable companies to implement effective internal controls, incorporating best practices that ensure a clear audit trail.
Very often, the call for stronger internal controls comes from outside the company. As financial institutions manage debtors more rigorously than ever, ERP systems provide a foundation for fast, reliable, and consistent financial reports, based on trusted systems with solid internal control mechanisms.
Challenge #5. Support for Legacy Systems Is Lacking
Many of the companies investing in new ERP software systems are doing so because their existing systems have become obsolete. Outdated legacy software may be slow and unwieldy, and it often lacks the features required by today’s businesses.
In some cases, older software may even be incompatible with newer computers, placing existing production systems at risk. If a hardware failure occurs, it could be difficult or even impossible to get an outdated system up and running again.
As the number of customers running legacy systems declines over time, it becomes harder and harder to find experienced technical experts to support the outdated software. As those skills become increasingly scarce, the cost of maintaining legacy systems rises. As the last generation of COBOL programmers reaches retirement age, for example, large organizations running mainframe computers are finding it more difficult and more expensive than ever to keep those systems running.
Many of the software companies that produced those older systems have stopped adding features and may even have discontinued support for them altogether. Very often, software vendors have developed newer products to replace the old ones. In an effort to move all their customers to the newer, more modern version of their software, ERP companies heavily promote the virtues of newer technology and offer customers incentives to switch.
While many customers follow their ERP vendor’s recommended upgrade path, others take the opportunity to shop for a new system among the many options available to them. In either case, newer ERP systems tend to be less problematic and less expensive to own and operate.
It’s All About the Information
Ultimately, ERP software is not just about the track of information. Yes, it is about better control and management of information and business processes, but it’s also about seeing the meaning behind all of that data, drawing actionable insights from it, and running a successful business. Having all that information in one place provides tremendous value for business leaders if they are prepared to use it.
At insightsoftware, we believe that financial intelligence (FI) is a defining characteristic of successful companies. Financial intelligence is a higher-order thought process about organizations and how they consume both internal and external information. At the heart of the FI paradigm is the ability to bring together data from multiple systems and to make sense of that information in a way that creates value for the organization.
In a rapidly changing world, agility is key. Businesses can no longer afford to be fixated on the rear-view mirror. Past performance and current conditions are critically important, but without a view to the road ahead, business leaders risk being blindsided by unexpected developments.
Providing financial intelligence tools for over 140 different ERP systems, insightsoftware has been helping business leaders transform their organizations by unleashing the power of financial intelligence for decades. If you are considering investing in a new ERP system, or if you would like to get more value out of your current systems, contact us to schedule a free demo and learn how you can generate higher returns on your ERP investments.