What is ERP? 6 Key Benefits of Enterprise Resource Planning
ERP, short for enterprise resource planning, refers to a type of software that sits at the center of an organization and enables easy management of critical business elements.
Here's everything you need to know about ERP software.
Enterprise Resource Planning: A Detailed Definition
Though ERP software's specifics can vary greatly from one program to the next, enterprise resource planning software typically covers:
- Inventory management
- Accounting
- Procurement
- Project management
- Sales and marketing
- Risk management and compliance
- Customer relationship management
- Human capital management
- Supply chain management
Comprehensive ERP systems also cover corporate performance management, allowing you to budget, predict, and report on financial results.
All things considered, ERP systems should be designed as the center of your software stack, replacing other, more disparate systems.
How Does ERP Software Work?
ERP software ties together business processes, so that data may freely flow between them.
For example, it can record a sale, and then:
- Automatically update inventory levels
- Record the sale in your general ledger
- Create a new customer profile
- Decrease inventory quantities
- Trigger reorder warnings for your supply chain operators
- And more.
Why is ERP Important?
ERP is transformational for many, as it serves as a business's single source of truth, ensuring that all teams and software have the most current information available.
The software helps:
- Reduce silos,
- Increase communication and agility, and
- Support the seamless flow of work, data, and other resources between departments and teams.
For example, financial operators can spend their time analyzing results and building comprehensive models to inform company action, rather than tracking down disparate teams to ensure all data is current and accurate.
Six Key Benefits of ERP
Enterprise resource planning and the software that supports it offer numerous benefits for organizations, including:
1. Increased Productivity
The right ERP solutions let you automate business processes, making it easier to scale without necessitating additional labor costs.
Automated workflows also reduce tedious tasks for human team members, allowing them more time to attend to business-critical efforts or engage in creative problem-solving.
2. Better Reporting
When you have a single source of truth that everyone can turn to, teams can streamline reporting.
First, leadership and other decision-makers can access real-time information to understand the right-now flow of the business.
Second, teams draw on the same data to support all projects and workflows, which reduces communication issues or the risk of two departments working toward differing goals.
3. Deeper Data Insights
ERP systems do more than support real-time reporting. They increase opportunities for business intelligence by providing opportunities for deeper, wider analytics.
When you can draw on data that encompasses your entire business, tasks such as forecasting and supply chain management are much more accurate.
4. Improved Agility
One of the major attractions of ERP systems is that they create foundations upon which businesses can build comprehensive - but agile - processes.
When you can see all of the business' parts moving in real-time, you can quickly shift workloads or call upon remote team members to meet rapidly changing customer/market demands.
5. Streamlined IT Requirements
With a single system that meets the specific needs of your organization, you cut down on complex IT processes and their associated technical expenses; ERP software that comes as a SaaS product reduces in-house IT requirements further.
When you choose such systems, you typically rely on your ERP vendor for system-related tasks, allowing your in-house tech resources to focus on higher-impact work.
6. Reduced Risk
ERP solutions help enhance corporate compliance, reduce the chances of data breaches, and support improved knowledge management.
All of these benefits lead to better control and reduce the chance your organization might face costly fines, sanctions, or other regulatory compliance penalties.
Examples of ERP Usage for Efficiency
Efficiency is at the heart of ERP benefits. When your business functions are more efficient, you can experience cost savings, better team morale, enhanced customer service, and a variety of other positive factors that help drive revenue and support growth. To understand how ERP use drives efficiencies, let's consider some examples.
SaaS Project Management
Imagine a SaaS company that manages development and upgrades via project management processes. An ERP can help optimize those processes so every team is working in tandem on efforts that support overall business goals.
For example, if the SaaS company wants to launch a new product and upgrade two existing products next year, that’s three separate projects. Chances are, however, the projects will draw on some of the same resources. If all project teams are working in the same ERP system, they can collaborate to share and schedule resources in the most efficient manner possible.
E-Commerce Inventory Management
Now consider the example of a retail business that has physical and e-commerce storefronts. Inventory management is a time-consuming task for single retail locations. Add multiple locations and the internet, and keeping track of what’s on the shelves can be daunting.
ERP systems support greater efficiency in retail business operations by providing a single source of truth about inventory.
Say your business has a limited supply of a special item; only 10 in stock.
As soon as someone buys one online, the ERP solution offers real-time reporting that indicates only 9 are in stock. No emails, phone calls, or back-and-forth between teams or locations required.
Human Resources Hiring Workflows
Let’s consider a final example, this time in a human resource setting. Picture an HR team that works to fill open positions for an entire enterprise. Necessary business processes for this work include:
- Getting notified of a new hire request
- Understanding the requirements and duties of the position
- Creating a new job description or updating an existing one
- Posting the job as open internally for a set period of time if the company requires it
- Posting the job as open externally
- Accepting and reviewing applications
- Scheduling primary interviews
- Conducting background checks and any skills tests to vet candidates
- Facilitating secondary interviews with hiring managers
- Making offers to selected candidates
- Onboarding new employees
That’s a simplified look at what hiring processes might look like for such an organization, so you can imagine how many opportunities there are for balls to drop and applicants to fall through the cracks.
A solid ERP solution streamlines these processes, automates various workflows, and makes it possible to fill positions much faster.
Types of Enterprise Resource Planning Deployment
Many types of ERP solutions exist. In fact, one of the benefits of ERP systems is that they can be customized to meet almost any business need. However, all ERP solutions fit into one of the following three categories.
Cloud-Based ERP - The New ERP Delivery Model
According to Gartner, more than 50% of enterprise IT spending will be on cloud resources by 2025. That’s especially true for tools like ERP and CRM solutions.
Cloud-based ERP software is delivered via the web, typically as a SaaS offering. Providers may offer modules you can choose from as building blocks to customize an ERP or holistic “out-of-the-box” solutions that make ERP implementation quick and easy.
With cloud-based solutions, you usually get ongoing support and updates. You can also work with your provider to configure customizations that keep your solution flexible enough to support your company as it grows from a small business to a large enterprise.
On-Premises ERP - The Traditional Delivery Model
Another of the deployment options for ERP solutions, on-premises implementations require that the software is maintained in the physical business space. That means the solution is hosted on your servers, offering a level of control that’s not always possible in the cloud.
On-premises solutions are less flexible than cloud-based solutions, and they tend to come with much higher initial capital investments. However, the level of control, security, and ownership you have over the solution can be attractive, especially in heavily regulated industries like finance and health care.
Fun fact: this delivery model is often incorrectly referred to as “on-premise”, rather than its actual name, “on-premises”. It is also sometimes shortened to “on prem”.
Hybrid ERP - The “Goldilocks” Delivery Model
In the past, most organizations had to choose between expensive on-premises solutions with full control or cost-effective and agile cloud-based options with less control. New technology makes it possible to get software solutions that offer the best of both worlds.
Hybrid ERP solutions leverage cloud and on-premises storage and deployment to meet business budget and functional needs. For example, you may choose to deploy customer service elements in the cloud to support remote workers and client portals. At the same time, you could opt to keep accounting and other sensitive workflows out of the cloud.
The Difference Between ERP and Financial Software
Financial tools, including accounting software, are often modules within ERP solutions. However, they are only part of the enormous pie that is enterprise resource planning.
While all ERP systems are unique, some modules or functions related to accounting and finance that you might find in these types of software systems include:
- Subledger accounting. The most robust financial ERPs include ledger accounting within the system. Others offer integration with common accounting solutions to ensure ledger data can be accessed as needed for other efforts.
- Payables. Workflows and reporting to process and track invoices let accounting departments ensure payables are handled. Automated options can increase efficiencies, reducing the time it takes to process invoices. That, in turn, can lead to savings when vendors offer discounts for early payments.
- Receivables. ERP systems that include financial modules may offer a way to track, report on, and collect receivables. One example is automated dating of AR and collections reminders that help teams chase old AR before it becomes bad debt.
- Invoicing and billing. Of course, one of the best ways to keep AR from aging is to ensure timely invoicing and billing processes, which ERP solutions can help with.
- Expense management. Everyone’s favorite thing. Managing expense reports is one of the areas of accounting that cascade across the whole organization. ERP solutions make it easier for people at all levels of a company to submit proper expense reports or purchase orders. They also make it easy for financial departments to shine by processing these requests in a seamless, efficient manner.
- Financial reporting. Whether you have an ERP that includes a general ledger or you’re importing payable and receivable data and other financials from an integrated solution, you may find that you have more flexible financial reporting options. From dashboards that provide leadership real-time data about accounting for better decision-making to balance sheets with a click, ERP financials can streamline your entire accounting operation.
ERP Fundamentals
You’ve probably figured out that the digital transformation supported by ERP extends well beyond the desks of the finance and accounting team. All core business processes and business requirements can be supported with the right ERP. From sales to order management to back-office details like invoices, ERP solutions help businesses create and maintain workflows that actually work.
Some quick wins a CFO can get when choosing the right ERP include:
- Better access to metrics for strategic decisions — and the ability to report more accurate, real-time data to other leaders or investors
- The communication and process efficiencies that come from a common database
- Substantial bottom-line savings across the entire organization
A Brief History of ERP
The ancestors of modern ERP systems were paper-based scheduling, accounting, and data analysis processes. Variations on these processes go back potentially centuries, but it wasn’t until the Industrial Revolution that economies of scale began to drive the increasing demands for efficiency and production that eventually made ERP deployment so important.
By the middle of the 20th century, basic computers were being deployed as tools within overall management systems. It wasn’t until the 1970s and 80s that computer systems were used commonly outside of manufacturing or STEM environments. By the end of the 20th century, computer software was used to automate tasks across all types of business departments, including finance and customer service.
The term ERP was actually coined by Gartner at the beginning of the 21st century, although various software solutions were already providing the services that would become the bones of future ERP modules.
As of 2023, ERP vendors enjoy a growing market that’s expected to continue expanding through 2029, while new careers, such as ERP consultants, grow in popularity alongside the market. New technologies, including artificial intelligence, are adapted by ERP providers regularly to provide ever-increasing functionality for enterprises.
ERP — The Bottom Line
As a financial leader in your company, profitability is likely always a concern. Taking a stance on ERP for business management and bringing these solutions to your enterprise can help you support efficiencies and other cost savings that make a real impact on profits.
That’s true in the long term, but you can also grab some low-hanging fruit almost as soon as you implement ERP solutions. Streamlined processes, enhanced collaboration, and reduced opportunities for error are just some of the immediate benefits that can save time and money while enhancing customer service and revenue.
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