5 Signs of a Struggling ERP / Finance System
For many businesses, their ERP system forms a key backbone of their business management infrastructure. This may be one system, or it may be several systems, integrated or separate. ERP systems capture information from, and help you manage, the following core process:
- Order processes
- Product manufacturing processes
- Stock management
- Financial processes
Enterprise level systems, such as Microsoft Business Central or SAP B1, will also have CRM functionality, and have the option to add a large range of apps that will extent the core functionality and support sector specific needs.
In short, you can run most, if not all, of your core business management functions from a single system.
Helping or hindering your business
When this system is working well and supporting your business you typically get good
- Visibility – with many ways to look at your business and understand what is happening
- Efficiency – IT processes replace people in undertaking administration tasks
- Control – the ability to set restrictions on what can and can’t happen, creating consistency of results
When the system is not supporting your business, then direct and hidden costs start growing due to
- Inefficiencies, including work arounds
- Lack of information
- Opinion based rather than fact-based decision making,
- Slowing reaction times,
- Poor controls for the size of business and variability of outputs
- More errors
Many companies start to mitigate the above issues with increasing headcount which adds costs. We have seen staff being added as a result of indirect admin impacts e.g. operational staff to help prepare reporting into finance. “Hidden” costs are not obvious and often can’t easily be quantified.
The impact on speed, information availability and decision making can be a significantly large hidden cost. We have seen these issues result in
- Problems not being addressed which increases stress and costs
- The wrong decisions being made as data was not available. Correcting these decisions later is costly in time and money
- Decision making takes a lot longer (expensive staff being inefficient) because they have little information available to help make the right choice
- Additional manual controls / reviews required which adds cost and time
- Increased errors taking time and effort to put right
The hidden costs can quickly become significantly more expensive that investing in replacing or upgrading your system or investing in supplementary software to run in parallel.
For example, you might have employed three extra staff in different departments costing a total of £140,000 including on costs as a result of problems with your systems. If you upgraded your system for a total first year cost of £100,000, the you have payback within the year. In Year 2 and onwards, the benefit would be significantly more.
Make sure that you review your system to make sure it remains fit for purpose and check for hidden costs. [Click here for a review example]
1st Sign – Requests for information or analysis take ages
You ask for a piece of analysis that will help you make an important decision. It does not arrive. You chase. It still does not arrive. You chase again. Eventually you get the analysis back. It is most of what you asked for and you are left with confusion as to why it took so long.
This situation happens. When you know the team are working hard and this happens consistently with more routine requests, it is a classic sign that the ERP system is not “fit for purpose” anymore.
The delay happens, because the team needs to work out how to get the information. This step is not easy with a system not set up to use the information in this way or lacks the functionality to extract the right data. When and if they are able to get the information, it takes time to format the data into something useable to answer the question you posed.
2nd Sign – Staff spend lots of time updating excel spreadsheets
Excel is a great tool – flexible, versatile and great for capturing and analysing data. It is a widely used tool, particularly in data heavy departments such as finance. If a system can’t do something, a common next step is to try to do the task in excel.
Excel is great for one off tasks or individual analysis. Ideally it should not be used for creating regular reporting or to hold critical data. The key reason for this is because:
- excel spreadsheets corrupt
- they are deleted
- only one person can use them at a time
- there are no or very limited controls available within excel
Excel is a “go to” tool. A high number of excel spreadsheets holding data or being used to analyse data on a regular basis is a sign that the system is not doing what is should be doing.
3rd Sign – Stock tracking / valuation is a big exercise
Stock remains a tricky area for most companies. There is a lot that can go wrong, particularly when you have multiple warehouses, goods on the water and similar challenges with ownership cut offs.
Keeping track of everything entering and leaving the warehouse (s) is challenging enough, with multiple processes needed to manage:
- inbound deliveries
- outbound orders
- deliveries of material to factory floor and receipts of finished items back
Stock usually starts out on a spreadsheet and them migrates onto a system. As the stock management process become more complex, the system’s functionality to manage these processes or how staff are using the system may fall behind what is needed. As this happens, the tracking and valuation of stock starts to become a bigger and bigger manual exercise.
Keep reviewing both the ERP system and your off-system processes to check they remain fit for purpose. Stock is a hard area to manage well. Don’t make it harder or more expensive than it needs to be.
4th Sign – Foreign Currency gains/losses are a growing number no-one understands
Foreign currency transactions on a true multi-currency ERP system, set up well, are reasonably straight forward to manage and understand.
On a single currency system, multi-currency becomes a headache.
A true multi-currency system holds different tables in the database for transaction in each currency. A single currency system holds only one table, and “converts” from this table to show different currencies to the user.
On a single currency system, as the level of currency transactions increase, the amount of FX difference increases. We have seen the FX difference being a bigger number than the profit number. It is hard to understand from what this number is made up of.
As the FX number grows, one month adding to profit, the next taking away from profit, it is hard to know where you are making a profit. Is that product performing as the reporting suggests? Is that team, that office, that subsidiary? FX problems cloud the picture. As it gets worse, more wrong decisions are made on poor quality data. And performance and profit suffer.
Change onto a true multi-currency system before your foreign currency transaction become a significant part of your overall business, particularly if you are in a low margin business with little room for error.
5th Sign – The finance team keeps adding headcount, but I am not getting more from them
The finance team will be a heavy user of an ERP system. They may not be the only team, so this applies to all “heavy user” teams.
There is usually a balance between using systems and employing people. When a system is working well you need less people, when it is not, you will likely need more.
The system approach usually gives you:
- better speed of data and insights
- greater efficiency and a lower cost of administration
- more control – of data, processes and workflows
- less flexibility
- higher investment then lower running costs. (SAAS models usually have a constant cost each year)
When the system is not working well, then additional people are required to manage processes or work arounds off system. You might get a similar result but at a higher cost. That does not make sense.
Your ERP system is a critical system to enable you to run your business well and take advantage of opportunities. The faster you grow, the more investment you will need to put into your systems if you want to maintain an efficient and effective workforce.
Keep checking that your system remains fit for purpose, effective and efficient. If it is not, check the business case for changing or upgrading your system.