What is ERP in Accounting? Types of ERP Systems & Benefits

Enterprise resource planning (ERP) software is used by organisations to integrate their core business processes into a centralised platform. In this guide, we’ll provide a detailed ERP meaning to broaden your understanding of how these systems work. 

According to Gartner, the enterprise resource (ERP) planning market grew 13% to a market value of US$51 billion in 2023. As businesses grow and find the need to improve efficiency while maintaining a certain quality of service, ERP software becomes an attractive option. 

However, ERP systems can be costly and complex, and it’s not uncommon for businesses to struggle with adoption. For these reasons it’s important to have a sound understanding of what ERP is, the features these systems offer, and the tradeoffs your organisation can expect when adopting one.

What is ERP Software?

ERP software gathers all of an organisation’s business tools in one virtual room, making it easier for teams to work smoothly and stay connected across departments. It acts like a central nervous system, helping to connect and integrate all the operations of a business. 

We’ll look at how ERP systems function and the history of ERP software in the sections below.

What Are ERP Systems?

To simplify this concept, here’s a useful definition: an ERP system is a software solution used to plan and manage a range of business processes. ERP systems help to improve business performance through a number of different functional modules such as finance, sales, manufacturing, supply chain management, and human resources. By integrating core business processes into a single platform, the organisation can run more efficiently.

The History of ERP

The first recognised ERP was the economic order quantity (EOQ) designed by Ford W. Harris in 1913. The EOQ was an inventory review protocol intended to help companies reorder at the right time to reduce inventory management costs. While brilliant at the time of development, this model assumed that demand, ordering, and holding costs all remained constant. Of course, no such assumptions are possible in today’s business environment.

Later, in the 1960s, the manufacturing industry was looking for more efficient ways to control inventory. This led to the development of material requirements planning (MRP), which was faster than manual processes – helping manufacturers monitor inventory and reconcile balances. 

MRP eventually evolved into ERP (enterprise resource planning), which provides a comprehensive approach to managing an entire business (one that’s not just limited to manufacturing operations). The term ‘ERP’ was coined by the Gartner Group in the 1990s. 

ERP vs MRP

MRP (material requirements planning) was developed when toolmaker Black and Decker computerised Joseph Orlicky’s MRP model in 1964. MRP was used to calculate the materials and components needed to manufacture products.

In 1983, manufacturing resource planning – or MRP II – came into use. As an extension of the original material resource planning model, MRP II software integrates other business functions such as general accounting, cost control, machine capacity, raw materials procurement, and demand forecasting.

ERP – which came about in the 1990s – is the next evolution of this type of software. Gartner defines ERP as a suite of business applications that share a common process and data model, covering a broad range of operational end-to-end processes. ERP is better than MRP because it offers a more comprehensive solution for managing an entire business – making it a more versatile and scalable solution.

Types of ERP Systems

To meet different business requirements across industries, ERP models have been developed for industry-specific needs. Purpose-built ERP systems include models for:

• Manufacturing
• Wholesalers and distributors
• Retailers
• Construction and contractors
• Professional services
• Nonprofits
• Accountants

In addition to industry type, ERP systems can also be classified by deployment method: on-premise ERP or cloud ERP. When it comes to highly sensitive operations or lawfully protected data, some organisations have a need to host applications on owned computing infrastructure. Hence, hybrid solutions that utilise both public cloud and on-site resources are not uncommon.

On top of industry-specific needs, a company’s size, number of employees, geographic distribution and internal resources for ERP implementation will influence solution selection.

What Are the Primary Features of ERP in Business?

ERP systems offer a suite of features that are able to manage the core business management functions of most companies. These features are less industry-specific and include tasks like generating financial reports, running company payroll and tracking inventory items.

ERP suppliers typically include some form of the following applications in their software:

• Finance and accounting
• Inventory and operations
• Customer relationship management (CRM)
• Sales orders
• Purchasing and supplier management
• Reporting and analysis
• Human resources and payroll.

These multi-module ERP solutions are often complex and come with high barriers to adoption. One of these modules – customer relationship management (CRM) – have more recently been included as a core module of an ERP. However, some businesses have been reticent to adopt new CRM software, instead seeking to continue using their best-fit solution.

ERP vs CRM

ERP (enterprise resource planning) and CRM (customer relationship management) serve different but complementary purposes. While ERP focuses on improving internal business processes, CRM is designed to manage customer interactions, sales, and marketing efforts. Many businesses integrate both systems to create a seamless flow of data between operations and customer management.

Some ERP systems come with built-in CRM modules, but these tend to be complex. Instead of attempting to adopt the one-size-fits-all type of CRM included in an unwieldy ERP system, growing businesses can benefit from using a best-fit CRM that integrates with their existing system. 

By sharing information via a common database, separate business applications such as payroll, inventory management and CRM can ‘talk’ to each other to avoid duplicate data entry and improve the accuracy of information across the organisation.

Benefits of ERP Implementation

The high-level benefits of an ERP system can be summed up in three main points:

• The free flow of information between business applications
• Real-time, accurate business insights across the organisation
• Ability to automate workflow processes

With improved collaboration and visibility, businesses of all sizes can reap the benefits of ERP systems. Information is power, and business processes connected through shared virtual workflows improve efficiency, enable superior business insights, and fuel better decision-making. All of this helps contribute to a healthier bottom line.

ERP Benefits by Industry

ERP helps businesses across all industries manage resources, automate workflows, and make smarter decisions. Here are some of the key benefits of ERP systems, based on the industry:

Challenges of ERP Implementation

Implementing an ERP system comes with its unique set of challenges. Here are some common hurdles and tips on how to mitigate them: 

• Cost of implementation: ERP systems require a significant investment, but the long-term benefits – such as improved efficiency and reduced manual work – can lead to substantial cost savings.
• Training and user adoption: Employees may struggle to adapt to a new system. Providing comprehensive training and ongoing support helps ensure a smooth transition.
• Integration with existing systems: Connecting ERP with current software and tools can be complex. Choosing a solution with strong integration capabilities or working with an implementation partner can ease the process.
• Customisation needs: Every business has unique workflows, and ERP systems may require customisation. Selecting a flexible ERP solution and working closely with suppliers can help tailor the system to your needs.
• Data migration: Moving data from legacy systems to ERP can be time-consuming and error-prone. A detailed migration plan and data validation steps help ensure accuracy.
• Downtime and disruptions: Implementation can temporarily impact daily operations. Phased rollouts and thorough testing before going live can minimise disruptions.
• Security and compliance: Ensuring data security and meeting industry regulations is critical. Choosing an ERP provider with strong security measures and compliance support helps mitigate risks.

How to Choose the Right ERP for Your Business

With many options available, it's important to find an ERP solution that aligns with your business needs, budget, and future growth plans. Here are key factors to consider when selecting the best ERP for your business:

• Assess your business needs: Identify key pain points and must-have features (such as financial management, inventory tracking, or CRM integration) to ensure the ERP aligns with your goals.
• Consider scalability: Choose an ERP system that can grow with your business. Cloud-based solutions often provide better flexibility and easier upgrades.
• Evaluate costs: Factor in upfront licensing fees, implementation expenses, training, and ongoing maintenance to ensure the ERP fits within your budget.
• Check integration capabilities: Ensure the ERP seamlessly connects with your existing tools, such as payroll, accounting, CRM, and e-commerce platforms, to avoid workflow disruptions.
• Look for industry-specific solutions: Some ERP systems are tailored for specific industries, offering specialised features that can streamline operations more effectively.
• Request demos and trials: Test the software’s usability, features, and reporting capabilities before making a commitment to see if it meets your needs.
• Review supplier support and updates: A strong support team and regular software updates are essential for long-term success, so choose a provider with a solid track record of customer service.

Final Thoughts

An organisation operating with a legacy system that doesn’t scale for growth or provide ready access to accurate information needs to make a change. Rather than adopting complex software with a steep learning curve, consider a solution that is simple to deploy and can be customised with best-in-class apps tailored to your unique business needs.

If you’re looking for an end-to-end solution that combines robust accounting with powerful business management functionality, QuickBooks Online is a great option. QuickBooks offers a comprehensive suite of financial management tools with seamless integration for payroll, invoicing, inventory, and reporting. 

While not a full-scale ERP, QuickBooks provides many core ERP features at a more affordable price – making it a practical choice for small to mid-sized businesses looking to streamline operations without the complexity of traditional ERP systems.

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