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What is ERP?

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mins

Last Updated

February 8, 2023

What is an ERP?

ERP is financial software that also tracks all aspects of your operations. In your current stack of software an ERP replaces (at least) your accounting software; it helps you calculate whether you are making a profit or a loss.

As a company becomes larger and more complex, it is impossible to calculate its financial position without tracking the performance of operations. This is why ERPs are also designed to manage operations as well as finances.

Small business vs medium business - software stack

What is the definition of ERP?

ERP is an acronym for Enterprise Resource Planning software. Operational performance is largely guided by how you assign resources – the number of staff on a project, the amount of inventory in your store, or the volume of raw materials in manufacturing. An ERP helps you work out how to allocate financial capital and other resources to optimise performance and maximise profits.

What does an ERP do?

On a practical level, an ERP uses modules to operate different parts of a business. The modules can cover many different activities according to the company’s needs and size. For example:

A professional services company such as an architectural or engineering firm will need to manage projects to ensure that the right staff have been assigned tasks.
An import-export business will need to manage inventory across multiple warehouses and move that inventory through e-commerce websites.
A manufacturer will need to manage suppliers of raw materials, factory capacity and quality control, as well as inventory and distribution.

These modules are used by most employees, whether they are in the field, stocking the warehouse, staffing reception or sitting in the back office. This is why ERPs are often referred to as the nervous system that controls the body of a business.

On a strategic level, an ERP is a platform that creates a single view of a whole business, from the warehouse to the sales team. This gives a leadership team a much better understanding of the company’s operational and financial position at any point in time. Consequently, managers can make faster and better decisions with an ERP.

By bringing all departments into a single platform, an ERP can create repeatable processes and task automation. This makes it easier to open more stores, operate in more countries, and sell more types of products and services.

In short, a successful small business will need to move to an ERP to continue growing into a medium sized business.

Functions managed by software

What modules are in an ERP?

Each module contains a number of functions that typically replace a collection of separate applications used by small businesses. Here are some examples of functions in common ERP modules:

A list of ERP modules
Area	Module	Tasks
Financial Accounting	Finance	General ledger, fixed assets, payables including vouchering, matching and payment, receivables and collections, cash management, financial consolidation
Management Accounting	Finance	Budgeting, costing, cost management, activity based costing
Employees	Human resources	Recruiting, training, rostering, time and attendance, payroll, benefits, retirement and pension plans, diversity management, retirement/retrenchment/resignation
Manufacturing	Manufacturing	Engineering, bill of materials, work orders, scheduling, capacity, workflow management, quality control, manufacturing process, manufacturing projects, manufacturing flow, product life cycle management
Ordering	Order Processing	Order to cash, order entry, credit checking, pricing, available to promise, inventory, shipping, sales analysis and reporting, sales commissioning
Purchasing	Purchasing	Purchasing (raw materials or finished goods), quote/purchase order automation, demand planning
Supply Chain	Supply Chain Management (SCM)	Supply chain planning, supplier scheduling, product configurator, order to cash, inventory, claim processing, warehousing (receiving, putaway, picking and packing)
Projects	Project Management	Project planning, resource planning, project costing, work breakdown structure, billing, time and expense, performance units, activity management
Customers	Customer Relationship Management (CRM)	Sales and marketing, commissions, service, customer contact, call centre support
Customers	Supplier Relationship Management (SRM)	Suppliers, orders, payments
eCommerce	eCommerce	Design and manage online store and inventory
Self-service portals	Data Services	Various "self–service" interfaces for customers, suppliers and/or employees

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You are no doubt already using a number of applications for several of these functions. An ERP can replace many of them. This can have many benefits – it removes issues with syncing data between applications, gives users a single interface rather than multiple interfaces, and means there is only one vendor to contact when there is a problem with the software. (For more information on this, read What is the difference between accounting software and ERP?)

Most importantly, it makes reporting across multiple functions much more efficient, detailed and powerful. When all operational and financial data is stored in one application you can see much more clearly how various operations affect financial performance.

A couple of important points to note here:

Not all ERPs have every module. Some ERPs are designed to upgrade financial reporting but have no modules for manufacturing. Many ERPs also don’t include a customer relationship management module. Instead, they integrate with a third-party application such as Salesforce instead.
ERPs assign functions to modules in different combinations. For example, some ERPs have a dedicated warehouse module for warehouse automation and a separate module for supply chain management.
You don’t need to use your ERP for every function. Applications that specialise in certain functions may have more features or a better interface than an ERP. In that case, you can keep using the specialist application and sync its data with the ERP module. This way your staff can use the application that they prefer and you can still have a unified view of your whole business via your ERP.
You can enable modules as you need them. Businesses will sometimes start with the core finance module and then gradually roll out other modules. This allows you to pace the change through all the different departments.
ERPs tend to fall into two categories, generalist and specialist. General ERPs are built around a core finance module and target all industries, sometimes with special “editions” for specific industries. Specialist ERPs emerged from particular areas such as manufacturing or human resources. They still have finance modules, however they can also integrate with other enterprise financial software.