Small businesses, when thriving, often swiftly transcend their makeshift processes and elementary technologies. As a firm evolves from serving tens to hundreds, and then thousands of customers, while simultaneously expanding its workforce and opening new offices, managing its affairs with the spreadsheet and paper record system it initially relied upon can become increasingly difficult. However, the leaders of these burgeoning enterprises often find themselves at a crossroads when determining their software requirements—do they need fundamental accounting features, or is a broader solution necessary? Consequently, these organizations are commonly found deliberating between the advantages and disadvantages of accounting systems vis-à-vis enterprise resource planning (ERP) systems.
What is ERP?
ERP, or Enterprise Resource Planning, is a comprehensive suite of software applications that enables businesses to manage and streamline nearly all facets of their operations. These systems’ databases typically encompass inputs from a variety of departments including accounting, human resources, manufacturing, marketing, sales, and supply chain management. With an ERP system, business leaders can leverage a unified view of enterprise data to automate workflows and generate valuable insights across numerous departments, thus identifying areas of improvement and driving efficiency.
The term ERP found its footing in the corporate technology language back in 1990 when Gartner recognized it as a unique category of software. Many globally successful corporations have been leveraging ERP systems for years, and with the advent of cloud-based ERP systems, smaller enterprises have also begun to adopt them.
Essentially, an ERP system allows businesses to govern all aspects of their operations via a single, harmoniously integrated platform underpinned by a unified database.
What is Accounting Software?
Accounting software, as the name suggests, is specifically designed to concentrate on a company’s fiscal transactions and activities. It is a system that assists businesses in managing their accounts payable and receivable, alongside other bookkeeping tasks. For example, it facilitates the creation of a trial balance, a critical component of double-entry bookkeeping. Additionally, accounting software aids companies in the compilation of financial reports, such as income statements and balance sheets, thus providing a comprehensive view of a firm’s financial health.
Fundamental Distinction between ERP and Accounting Software
The fundamental distinction between ERP and accounting software lies in their respective scopes. While accounting software focuses on managing and automating a company’s financial operations, thereby helping smaller firms progress beyond their rudimentary manual processes and spreadsheets, ERP software incorporates these accounting functionalities and goes a step further with an array of additional capabilities.
Highlighting the Differences
As small businesses expand, they often find themselves dedicating an increasing amount of time to managing their finances. Consider an entrepreneur who sets up a meal-kit delivery service, supplying ingredients with easy-to-follow cooking instructions. With a modest customer base of around 50 to 60, they might manage their accounting manually or using simple spreadsheets. However, if their business flourishes and their customer base multiplies to a thousand, then five thousand, and ultimately ten thousand, the bookkeeping task quickly becomes daunting.
It’s at this juncture that entrepreneurs typically start exploring software solutions to enhance their business efficiency. Their first inclination might be towards an accounting package, given the organizational challenges that rapid growth presents: tracking sales, processing payments, settling supplier bills, and computing profitability. An accounting package can certainly aid with these tasks, but it cannot independently track suppliers, manage a burgeoning workforce, or provide insights into warehouse costs and operations.
Rather than segregating their data—with accounting information in one software package and HR, manufacturing, and customer data scattered across various spreadsheets—entrepreneurs can centralize all data and gain a holistic view of their business via an ERP system. By doing so, small businesses can unlock insights they might have otherwise missed and make informed decisions that enhance their profitability.
Key Differences of ERP & Accounting Software Capabilities
|Can manage virtually all aspects of a business||Focuses on bookkeeping — general ledger, chart of accounts, accounts payable & receivable|
|Able to generate insights for all business operating areas||Analysis limited to financial data|
|Produces reports for all business aspects, incorporating financial and operational data||Produces reports based solely on financial information|
|Scales from small businesses to large enterprises||User seats or licenses and customer record numbers limit scalability|
|Costlier, but cloud-based offerings are affordable||Relatively inexpensive for small businesses|
|Requires a business case with needs analysis before deploying||Easy to deploy, even ad-hoc|
|Substantial learning curve to exploit full capabilities||Easy to learn; self-training usually sufficient|
ERP systems represent a unified approach to managing all business operations, whereas accounting software focuses strictly on the finances.
Embracing ERP for Sustainable Growth
In their initial stages, companies often operate in an ad hoc manner. However, as they expand, such an approach needs an overhaul. It may no longer be feasible to store inventory or process orders from the founder’s garage. With the business operations being carried out from resources located elsewhere – a mile, a state, or even halfway around the world – effective management becomes essential.
Given its multiple modules encompassing areas like supply chain management, customer relationship management (CRM), and HR, ERP often emerges as the most scalable choice for burgeoning businesses. Imagine your company has recently patented an office supply product with a vast network of distributors and retail suppliers. An accounting system alone wouldn’t suffice to keep track of the orders, shipments, and supplies, likely resulting in data sprawl across different spreadsheets. However, an ERP system offers a structured way to organize and rapidly access any necessary information.
Beyond managing the evolving operational methods as your business grows, ERP software provides an integrated perspective of your business by consolidating all business processes and functions into a single database, significantly enhancing efficiency. Consider an order-to-cash process where an order is received by the sales team or through a web purchase, forwarded to the warehouse, a pick list is created, inventory is adjusted, and the product is shipped. Manual tracking of these steps would be slow and prone to errors. An ERP system, however, would automate a significant part of this process.
The integrated nature of ERP— the ability to view and interlink all business aspects in one place—could lead to further enhancements. It could streamline production planning and scheduling, and automate certain components of your supply chain, fostering a more efficient and productive business environment.
Video Guide: Navigating the Differences between ERP and Accounting Software
Embrace Growth with NetSuite
When small businesses experience that coveted surge in sales, their instinctive first step is usually towards adopting accounting software to automate the increasingly cumbersome financial tasks. NetSuite ERP, with its robust suite of financial and accounting functions, can offer immediate respite. Businesses can utilize NetSuite ERP not only to automate facets of their accounts receivable and payable, but also to swiftly glean critical financial metrics and ensure compliance with accounting standards and tax codes.
However, most rapidly growing small businesses soon identify that other areas of their operations could also significantly benefit from automation and specialized software. For instance, a company might desire a more efficient solution than email for order processing. Another might require a more effective tool than a spreadsheet for its inventory management. NetSuite ERP extends beyond financial functions to offer these operational capabilities, along with several others including inventory and order management, HR, customer management, warehouse management, project management, and supply chain management.
“I need accounting software” is often the initial reaction of a small-business owner witnessing their enterprise’s expansion. It’s natural for entrepreneurs to feel the urgency to streamline their financial systems. Yet, most small businesses could also leverage other types of software to manage their customer relations, supply chains, order processing, and various other operational activities. Enterprise resource planning systems amalgamate a broad spectrum of business functionalities. Hence, for entrepreneurs grappling with the question of scalability, considering a cloud-based ERP system like NetSuite ERP is an avenue worth exploring.
Frequently Asked Questions About ERP and Accounting Software
Does ERP encompass accounting?
While accounting software is generally included as a component of an ERP system, it’s crucial to note that it serves a narrower purpose and is not identical to a comprehensive ERP system.
Can Xero be classified as an ERP?
Xero is a cloud-based accounting solution designed specifically for small businesses, not an ERP system. Its features primarily assist with bill payment, expense management, and certain banking activities, lacking the extensive functionality typical of an ERP system.
How do traditional accounting systems differ from enterprise systems?
Accounting systems aid businesses in managing their financial activities and are commonly employed by small businesses in the early stages of growth. Enterprise systems, on the other hand, not only perform accounting tasks but also offer a significant range of additional functionalities. These include supply chain management, distribution, and customer relationship management, to name a few.