Moving from Accounting to ERP

Abstract

There are literally millions of small business firms. Many remain small in terms of revenue and complexity. Some grow over time and a very few become large firms with many employees in many locations. While the vast majority of these firms use what I would call an accounting system, the firms that grow significantly might need more functionality than that offered by any small to mid-sized business accounting system. The question these firms need to answer is when should they invest in an ERP business management system?

Accounting vs. ERP

Let’s start by defining what we might consider to be a small to mid-sized accounting system. In general accounting systems process and record business transactions such as paying bills, paying employees, generating and recording sales invoices and recording customer payments. All of these records get posted to General Ledger where income statements and balance sheets can be generated. All of these transactions are relatively simple. Actually all of these transactions can be found in an ERP system.

If that’s the case, what separates accounting from ERP? The difference can be found in the term ERP (Enterprise Resource Planning). “Enterprise” implies that there is more than a single location. While the underlying objective is still the generation of Income Statements and Balance Sheets, the information generated needs to be associated with various physical locations and lines of business. Small business accounting systems can segregate information into categories, but not necessarily with the depth that larger firms require.

“Resource Planning” implies that the system itself supports the decision making process, and that is where small business systems start to falter. If you consider a small distributor or even a small manufacturer, managers are front line planners, using their years of experience and seat-of-the-pants industry expertise to balance supply and demand. The accounting system might give them some information regarding workloads and stock levels, but the day-to-day decisions are based primarily on experience, not data.

As companies grow, workloads increase to the point where individuals do not have the ability to “see” everything at the same time. Their experience is still critical, but the sheer volume and complexity of business processes makes the decision making process overwhelming. That’s where the ERP system steps in to supplement the decision making process. Notice that I have used the term “supplement” not “replace” and maybe that’s where many ERP systems fail.

ERP systems can process vast quantities of data very quickly and that’s what is required. We would like to think that they can be programmed to make business decisions, but this is a slippery slope. We can design robotic cars, but they never seem to reach their destination without wandering off course several times. The same holds true for ERP systems. We can write code that will make decisions, but we have to be careful. Business processes do not lend themselves to straight line logic. Most of the time the process can be relatively straight forward, but Murphy’s Law (that which can go wrong will go wrong) is always lurking. Complex business processes are not always linear in nature and we need to make sure that our ERP system is “supplemented” by human experience and expertise.

Making the leap to ERP

OK. Let’s come back to a starting point. You are a small business that is beginning to grow beyond the capabilities of your current accounting system. At what point should you leap on the ERP bandwagon and if you do so, how high should you jump?

Rather than going into great detail, let’s just raise some questions that should be asked and answered.

Don’t assume your current system can no longer serve your needs. Many small business products can be supplemented by fairly sophisticated report writers, third party applications and of course customization. Actually your first step should be making sure that your current system is operating on the latest release. Sit down with your local reseller and evaluate your future requirements. If you decide that your current system does in fact need to be replaced, make that decision only after you have evaluated all possible alternatives.Anticipate the future. Rather than waiting for an information and functionality crisis, look into your future. While forecasting in this challenging economy is fraught with uncertainty, you need to be proactive when it comes to the information and functionality you “might” need in the future.Adopt a learning posture. Although it’s certainly important to listen to what people in your organization say they need, learn as much as you can regarding what’s possible in terms of information and functionality. Most firms tend to be myopic when it comes to functionality. Learn from others in your industry (including your competition). Maybe they know what you could be doing. This doesn’t mean you should blindly follow what others are advocating or doing. Your firm is unique if for no other reason than each person is unique.Don’t assume you have to be the best of the best. The fact that your firm is growing and your current business management system might need to be replaced in the not too distant future doesn’t require that you spend $250,000 or $500,000 or more to acquire a top of the line ERP system. Maybe you don’t need all of the bells and whistles. Maybe a top of the line ERP system may be too complex. You need a system that fits within your budget, meets your reasonable functional requirements and does not exceed the capabilities of the people who will be asked to use the system.Evaluate middle market solutions. This is a follow on to the previous suggestion. If you are using a small business accounting system, make sure you at least look at products that are more comprehensive than your current system, but less comprehensive that top end ERP systems. This doesn’t mean you should not move to the top end, but do so only after you have determined that middle market solutions are not appropriate. You might be surprised at the power middle market can bring to the table.