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What is ERP Software?

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Updated 1/5/2017: We’ve added some additional information to help readers better understand the benefits and risks involved in ERP implementations.

You’re browsing accounting or inventory management software, and you keep coming across the term “ERP” – but what is ERP? Enterprise resource planning software is a key component to many larger or more complex businesses. The fundamental goal of an ERP installation is to bring all of your data under one roof, unifying the way you manage your business.

 what is erp

In this post, I’ll lay out the benefits of ERP software and talk about some of the challenges of getting one up and running. By the end, you should ready to go forth and implement. Or at least start thinking about shopping.

Benefits of ERP software

Businesses are made up of interlocking functions and responsibilities.

Even in the most basic business, you’ll find a segment that produces goods for sale, a segment that sells the goods, and a segment that manages employees. In a very small business, those responsibilities may all be overseen by a single person, but they all still exist.

As you increase the complexity and size of your business, more and more functions need to come into play. These roles don’t exist in isolation, though, and those functions need to understand what the other functions do.

Take your basic manufacturer. You’ve got raw material that turns into finished products that are sold. In that business, the finance department needs to know how much money it’s spending on material, how much it’s charging for finished products, how people get paid, what its inventory looks like, and where everything is.

At the start of its life, those functions might all be managed by different people and pieces of software.

Tom knows how much yarn is on hand and Jean knows how many rugs there are, but no one looks at both figures. On top of that, Tom might count a “sale” as every rug that’s produced, while Jean only counts the rugs that go out the door.

An ERP brings all of those disparate pieces of information together, giving businesses a single version of The Truth.

By using an ERP, you can get a clear picture of what’s actually happening in your business without having to pull together everyone who works there in a single meeting. You can track sales more accurately and you can manage costs more effectively.

How it works

ERP software manages all this by creating a unified dataset for your business. Instead of your sales numbers being held in one place by finance and one place by sales, for instance, there’s just one number that both entities see.

When an ERP is first implemented, businesses sit down and define all the terms they use – sale, expense, employee, year, etc. Then, the business can build those definitions into its database so that there’s no confusion about what’s being recorded.

It means that, as the business grows and changes, everyone can make decisions using the same definitions. Looking at sales today will be the same as looking at sales next year and it will be the same view in finance as in marketing.

It also means that your business can make quicker decisions. As each change is made in the unified data, that change is reflected across the organization. No one has to wait for the monthly sales update to see how sales are affecting inventory – they can check any time they want.

It’s this single view and definition that gives an ERP its real power to change a business.

The drawbacks of ERP software

Go to the pet store, buy yourself a couple dozen mice, and drop them in a mall food court. Now, try and herd those mice back into the box you brought them in. This is ERP implementation in a nutshell. The larger the business, the more difficult it is to get everyone and everything on the same page.

Given all the difficulties, it’s frustrating – if unsurprising – that ERP failure rates run over 20%. That means that one out of every five ERP implementations just didn’t work. With many ERP systems running into the tens-of-thousands-of-dollars range, those are expensive failures.

One of the biggest issues is finding those common-ground definitions for your data. While it may seem like an easy fix, there are actually some great reasons for data to take on multiple forms, depending on where it’s created and used.

For instance, the sales team may recognize a sale as soon as the client makes a commitment to purchase, while finance won’t recognize the sale until some percentage of the cash is received. It makes sense for both teams, as sales needs to accurately and quickly pay its sellers while finance needs to wait and see how the actual payments shake out.

These sorts of discussions should be held before you start actually looking into software solutions. Depending on how you decide to manage your data, you may find that one solution is better than another. These are details that you want to be figuring out now, not in the middle of implementation.

Finding the right version of the truth or planning a workaround is going to be integral to the success of an ERP implementation.

Final thoughts

Before any business makes the leap to an ERP, it needs to understand what the challenges and risks associated with ERPs really are. While they can solve many problems, ERPs can be fickle and frustrating beasts — these are not silver-bullet solutions.

Spend the time and money early on to determine what your company really needs from its software and if an ERP is the right choice. There are plenty of ERP consulting firms out there that would be happy to walk you through the steps to make your business run more smoothly.

To check out a full list of ERP solutions, swing by Capterra’s ERP software directory. You can see reviews, features, and recommendations from other users. Good luck!

Header by Rachel Wille

Looking for Logistics software? Check out Capterra's list of the best Logistics software solutions.

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About the Author

Andrew Marder

Andrew Marder is a writer for Capterra. His background is in retail management, banking, and financial writing. When he’s not working, Andrew enjoys spending time with his son and playing board games of all stripes.

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