The question of whether to embark on an ERP journey is not easy -- the road to an ERP implementation is littered with the wrecks of pileups and lost travelers.
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Still, despite the risks, it’s clear that some companies need the more robust functionality that only a true ERP financial package can provide. The trick is noticing key indicators that show a company is ready to move beyond smaller-scale systems and into a full ERP package to manage their financials.
“A good indicator is always growth,” said Alan Fang, chief operating officer for ERP Logic, an SAP partner and reseller based in Irving, Texas. Top-line growth (rising gross revenue) is an indicator that seems great but offers no clear picture of bottom-line growth (net income).
“This means financial visibility is almost nonexistent and would require the growth to be managed accordingly so the top-line growth translates into bottom-line growth as well,” he explained. “Often financial visibility is translated by operational visibility -- where the heavy transactions occur -- so you need to get your operation in check first, and a robust ERP system is the key.”
ERP financials aid cost management, cash flow
According to Jonathan Gross, vice president and corporate counsel for Toronto-based Pemeco Consulting, another reason businesses start looking toward ERP systems is when one or both of two financial red flags are raised.
“The first flag is an insufficient understanding of costs,” he said. “As businesses grow, they need to do a better job of managing costs. Manual and spreadsheet-based systems often make it difficult to analyze relevant costing information in a meaningful way -- for example, actual, standard, and variances. ERP systems can help these businesses produce timely margin reports and analyses.”
The second flag is difficulties managing cash flow, Gross added. Businesses often need a real-time application to manage working capital if they are to fuel growth and operations.
“A system with integrated accounts receivable and payable functionality provides visibility into cash flow, and an ability to actively manage the aging of accounts receivable and payable,” he said.
Meanwhile, another way to discern whether a business is ready to make the move to ERP is to look for symptoms, said George Lawrie, a vice president and principal analyst for Forrester Research, based in Cambridge, Mass.
“One such symptom could be that you’re missing opportunities to up-sell and cross-sell to the same customer because that customer is in different [software] systems,” he said. “It could be your salespeople are offering very different terms to different divisions of the same customer.”
Another symptom organizations should consider is if they’re doing a mass of manual workarounds and find they don’t have flexibility, Lawrie added.
“I’ll give you a great example -- we see a lot of companies that want to implement a multichannel strategy where they want to sell products or services online or have a relationship with customers online, but their challenge is that the data around each customer is so fragmented, they can’t orchestrate the relationship around multiple channels,” he said.
Other core symptoms include situations where selling, generating and administrative (SG&A) expenses are significantly out of line with a company’s peers. For example, if competitors have lower SG&A expenses, it usually means the company is doing too much manual work.
Common ERP implementation pitfalls
In addition to knowing when a company needs the technical solutions in an ERP system, the growing company also needs to be wary of common pitfalls with ERP projects as the journey gets rolling. For example, Fang said, many organizations may not understand the effort and investment necessary to achieve ERP system implementation success.
Organizations first need to understand exactly what the pain point is -- and the root causes of the pain points. Then they can select a system that addresses those pain points.
Of course, even if you understand your pain points and choose the right ERP financial package, a company still has to map out the trip and drive well, Fang said.
“Proper migration to ERP financials can be risky and challenging if not done properly,” Gross warned. “For example, in 2008, Overstock.com was forced to restate its financials for the previous five years. Over this period, it had overstated its revenues by $12.9 million. Why? Overstock.com had failed to properly map its customer refund transactions to the appropriate GL account in its ERP system.”
And how can a company avoid a similar fate?
“First, make sure that open accounts receivables and payables are properly migrated. Businesses will want to minimize disruptions to working capital. Second, ensure that logistics transactions are mapped to the correct general ledger (GL) account. Third, ensure that open GL balances are migrated correctly,” Gross said. “Fourth, and perhaps most important, ensure that the financial data being migrated is clean.”