In today’s global, highly regulated business environment, core accounting applications and financial management...
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software play a more important role than ever in keeping organizations operating efficiently. As a result, today’s financial applications market provides a wide range of options that organizations can use to tailor their financial software systems to their size, complexity and global reach.
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But no matter what add-ons an organization eventually chooses, the success of the entire system begins and ends with a handful of core accounting capabilities. These “must haves” include the following:
General ledger. As the foundation of financial management software, the general ledger, or GL, provides an ongoing accounting record of financial transactions. The system categorizes and summarizes these transactions into accounts, which are unique records for each type of asset, liability, equity, revenue and expense.
Accounts receivable. These asset accounts in the GL track what customers owe after purchasing goods or services.
Accounts payable.The flip side of receivables, these liability accounts in the GL show what the business owes for the goods or services it purchased.
Additional modules in a core financial system may include tools for cash management, credit and tax management, procurement, order management and payroll.
Three tiers of financial management applications
How these foundational capabilities are implemented varies depending on the size and the complexity of the organization’s operations. Small companies with relatively simple financial management software needs typically rely on a single-purpose accounting package designed for a limited number of customers and annual sales. The advantage: These applications are built to be easy to install and operate. Their hardware requirements are equally modest; in most cases only a single server is needed to run the programs. Nevertheless, these packages provide the core accounting requirements that a company with several hundred or fewer employees typically needs.
The next tier, for midsize companies, builds on this foundation either with modules from the same vendor or with integration “hooks” that allow users to plug in third-party financial applications. These capabilities may include additional financial functions, such as tools for managing multiple divisions or currencies, or related nonfinancial resources, such as programs for managing sales forces and customer relationships.
The third tier of core financial applications targets large or complex enterprises that need a comprehensive ERP suite to act as the financial management foundation and as the platform for running specialized modules and customized business processes. This option offers the most flexibility and sophistication, but at a price: Large-scale ERP systems often take months or years to launch, along with significant people and financial resources to maintain them. As a result, once an organization selects one of these systems, it is likely to stick with the choice for the long term. “There’s zero benefit to make a change unless the orderly conduct of their business is threatened for some reason,” said Robert Kugel, senior vice president and research director at Ventana Research, an IT advisory company based in San Ramon, Calif.
Companies may move from one tier of financial management applications to another because of fundamental changes in the organization itself that require more sophisticated capabilities. “It comes down to how complex your selling process becomes, how your business is growing or if you are expanding into new markets,” said Chris Arndt, a partner at Red Granite, a Chicago-based technology consultancy.
Vertical focus key in choosing financial applications
An organization’s vertical market is another consideration when it chooses from among the more extensible financial management applications. Various packages offer capabilities tailored to the financial accounting needs of retail, manufacturing, construction, professional services and other markets.
“If I’m in discrete manufacturing, for example, I wouldn’t just be looking for accounting software generically,” Kugel said. “There’s accounting software for me that really speaks to some of the special needs, such as the ability to measure the specific inputs and outputs that I may be using.”
For example, manufacturers may want logistics accounting applications for managing freight costs. Accounting for fixed assets, including depreciation of equipment, will also be important to this segment, according to Kugel. Another consideration is whether the software offers help for complying with government regulations the organization faces, including Sarbanes-Oxley rules for public companies. When regulatory compliance is a factor, financial platforms should include modules for governance, risk and compliance, or GRC, he said.
Global organizations that transact business in multiple currencies should look for modules that can roll up transactions into the core accounting system and aggregate data for reporting, according to these analysts. They suggest other key capabilities to look for, including financial software that provides the latest updates to U.S. Generally Accepted Accounting Principles, or GAAP, or the European Union’s International Financial Reporting Standards, or IFRS.
Exploring XBRL for financial reports
Finally, public companies are now required by the U.S. Securities and Exchange Commission to encode their financial reports using the Extensible Business Reporting Language (XBRL), an open standard that makes it easier to exchange business data.
“That was the straw that broke the camel’s back in terms of moving companies to automating the activities that take place after the financial close,” Kugel said. “XBRL is applicable not just when creating SEC filings. It’s also useful for the periodic statements you create for the board of directors or for lenders.”
Kugel noted that even private companies that aren’t required to file with the SEC may get value from XBRL. “The software allows you to assemble text and tabular data in a way that’s just a whole lot faster and more efficient that with manual processes,” he explained. “Companies that aren’t automating these activities are making a big mistake.”