How to Turn Your Accounting System into an ERP
When I was writing for my accounting designation on Bay Street in Toronto over years ago, I was shocked at how many huge public companies used spreadsheets to track important company information. These billion-dollar companies were relying on spreadsheets – the modern version of paper and pen, subject to human error, emotion, sore eyes, and a bad day – to manage assets and make very big decisions.
The biggest danger is that spreadsheets make bad data look good. They can imply a false level of credibility and confidence.
One of my first tasks (and it was very painful) was to check the accuracy of a huge spreadsheet model. It took two days out of my life. I’ve worn glasses ever since. And I still have nightmares about those spreadsheets.
There is a better way.
Every business needs real-time data about sales, operations (to deliver on the sale), and financial performance. Some big companies, and some medium-sized ones too, have sophisticated Enterprise Resource Planning, or ERP software.
All small companies have accounting systems. Most small companies don’t have ERPs, or don’t need one, or can’t afford (and shouldn’t afford) a full ERP…yet.
How to Convert Your Accounting System into an ERP
The objective is to track sales in units and production in units, to the level of detail that is useful for your management team. Here are the steps to convert your debits, credits, and dollars accounting system into an ERP:
Add Unit Accounts: On your income statement, add accounts in your revenue and cost of sales categories that measure individual units of production. For example: billable hours, square feet, or units of production.
Measure in Single Units: Measure the units in single units. One hour, one square foot, or one of whatever you produce equals one unit.
Create Offset Accounts: Within each section of your income statement, create an offset account for all of the units tracked in the section, so the dollar impact on that section of the income statement is nil.
Be Specific: Be as specific as you need to be. Once the accounts are created in your accounting system, the only effort is coding to the right account. The data entry time is the same regardless of whether you lump all data into one account (not recommended) or you have 20 accounts or more.
Why Put Everything in One Place?
The purpose of this exercise is to help your management team obtain real-time information from your accounting system.
System vs. Spreadsheet
Accounting Systems have structure, integrity, and accuracy.
Spreadsheets do not have structure, integrity, or accuracy. Spreadsheets might also require redundant data entry.
Spreadsheets keep me up at night. I’ve seen too many good companies rely on spreadsheets that had errors.
By inputting your sales and operations information into the system that already tracks your financial information, you’ve put everything in one place. This process will make moving to an ERP in the future, if you actually need a full ERP, much easier.
Most industries will benefit from having a sophisticated ERP for their business because of one important factor: planning.
You can make plans and set targets in an ERP.
You can track performance against plans.
You can generate exception reports to attract your attention when performance is outside of an acceptable range from the target.
If your accounting system can handle budgeting, and most do at the income statement level, you likely have the capacity to plan in your existing system. That’s much better and safer than spreadsheet planning.
From the Vault
When management has all three pieces of information about your business – sales, operations, and financial – in a reliable and accessible information system, they can make better decisions, faster. Better decisions generate better results.
Have a profitable week!
