What is ERP and how does it work? Your guide to enterprise resource planning software

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While customers receive a neatly packaged product or service, businesses have the monumental task of managing everything on the backend, from supply, production, and staff to marketing, financials, and more. With so many business processes to coordinate and monitor, it’s essential to have one central hub where you can see your real-time data, spot problems, and make improvements. 

It’s possible to cobble a system together using manual data entry, integrations, and reports. But many companies choose an enterprise resource planning (ERP) system to simplify their operations. While “enterprise” is in the name, ERP software isn’t just for mega-companies. Businesses of all sizes, including startups and small businesses, can leverage ERP tools.

So, what is ERP and how does it work? This guide gives you the ERP fundamentals, including key ERP features, the right time to get ERP software, and the benefits of ERP software.

What is ERP and how does it work?

Enterprise resource planning (ERP) is a type of software that companies use to oversee their daily business activities, such as:

The main appeal of using an ERP system is that your team works from the same up-to-date information rather than disconnected databases that aren’t “talking” to one another. That means everyone can see the real-time inventory count, customer history, sales targets, and other key metrics they need. 

You can choose individual ERP applications or modules, like an accounting and expense management module. Or you can opt for a complete ERP system, which offers a suite of ERP applications that let you track and analyze the entirety of your business operations. You’ll typically have access to multiple customizable dashboards with snapshots of business performance — changes, alerts, and action items — by area. 

Most modern ERP providers operate on a software as a service (SaaS) model, whether you’re using a few applications or the full system. As such, you’ll likely pay a monthly fee based on the number of users, devices, locations, or applications you need. 

By connecting these different systems under one central database, your company can actively assess your core business operations and boost efficiency and productivity. Data flows seamlessly between applications, either on-premise or in the cloud, so ERP software virtually eliminates data duplication and human error. 

Beyond day-to-day management, ERP systems offer unique business intelligence. Rather than analyze areas separately, you can see how each one — your sales, logistics, and customer service teams — works together. These insights inform and improve your decision-making, helping you accelerate profitability and growth. 

Now that we've covered how an ERP system works, let’s review when it's time to implement one. 

When does a business need an ERP solution?

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Regularly assessing your company and identifying areas for improvement is a crucial part of business development. If you notice the following examples cropping up within your operations, you may be ready for an ERP solution: 

  • It’s difficult or time-consuming to analyze data across your business or get accurate projections. 
  • Your team depends on programs, databases, or spreadsheets that must be updated manually but are constantly out of sync. 
  • The costs of individual software applications, like monthly subscriptions, upgrades, and training fees are becoming too expensive. 
  • You’re continually switching between software, or your apps aren’t integrating seamlessly with one another.
  • Your sales, customer experience, or service reputation is deteriorating due to mistakes from incorrect, outdated, or incomplete information.
  • Your IT team is regularly patching together old legacy systems just to keep pace with your company’s growth, new regulations, security requirements, technology, etc. 

Every business faces bottlenecks, but it’s essential to act quickly before they negatively affect your customer base or erode your workforce productivity.

Core modules of an ERP system 

Every ERP system is unique, and some may be tailored to different industries, verticals, and sizes. Some modules offered by ERP vendors may not make sense for your particular company. 

For instance, a 650-person international clothing company will need a payroll and benefits module that’s much more complex than one used by a 30-person startup. What’s more, the smaller company may not need travel expense capabilities or global tax support.

The good news is that most ERP systems can be customized to fit specific needs and different processes. New ERP software typically includes the following modules and features: 

Sales and marketing 

The sales and marketing module lets you manage workflows like purchase orders, sales orders, inquiries, quotes, estimates, invoices, and business taxation. These sales transactions trigger the procurement process. You can also integrate your point-of-sale (POS) system or work with your vendor to find a payment processing partner.

Customer relationship management 

The CRM module lets you manage leads and serve customers with ease. You can also access your customers’ purchase history, contact information, communication history, and more. In most ERP systems, the CRM information is often part of the sales module to improve efficiency and uncover sales opportunities. 

Finance and accounting

The finance and accounting module makes it simple to manage core areas like your expenditures, accounts receivable, accounts payable, general ledger, and financial reports (income statements, balance sheets, cash flow statements, etc.). If you already use accounting software like QuickBooks Online or Xero, you can integrate it with your ERP. Not only does the real-time data integration ensure accuracy and minimize risk, but it saves the back office a lot of time, too.

Human resources management 

The HR module gives you access to key employee management tools like timesheets, time tracking, and employee records. Some ERP systems include payroll systems and performance reviews within the HR module. It’s also closely tied to the finance and accounting module to easily capture wages, expense reimbursements, and other payouts. 

Supply chain management

The supply chain module lets you optimize each aspect of order fulfillment for your company, from demand and procurement to production and shipment. Connect your suppliers and automate your manufacturing, logistics, and distribution process. You might also use it to handle returns, refunds, and recalls. Combine this module with the inventory management or purchasing module. 

Additional features 

Highly rated cloud ERP software solutions — like Oracle NetSuite, Microsoft Dynamics, and SAP Business One — go beyond basic functionality. They also offer advanced features such as asset management, ecommerce support, and industry-specific tools, which are particularly useful for large enterprises and niche sellers.

The bottom line: What is ERP and how does it work?

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An enterprise resource planning system (ERP) takes disparate and disconnected business functions and streamlines them into one cohesive control center. As such, it’s invaluable if your company is scaling, acquiring or merging businesses, or simply trying to get a better grasp on company data. 

At a minimum, your ERP system should provide a unified and updated view of your sales, financials, materials, and inventory. It should also include convenient, seamless integrations with your preferred business software, or a comparable module that suits your needs. Choosing the right ERP system will take some time, but it's worth the effort.

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