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Many businesses today are evolving faster than their finance systems, with serious consequences for the entire company. We take a look at the financial and operational impacts of using an outdated finance system and how to overcome them.
After a period of rapid growth, a company’s finance systems and infrastructure are often left behind. Designed and implemented when the company was smaller, they are now not fit for purpose to service the larger entity. For example, the company may have diversified into new markets or products, or it may have acquired overseas subsidiaries and is now a multi-entity business operating with a number of currencies. When its functions such as accounts, planning, procurement, sales, marketing or customer relations begin underperforming, it’s a sign that the current system may be in need of a re-think.
Manufacturing and engineering companies are particularly affected by outdated systems, both in the UK and globally. Reports suggest that only half of all manufacturers have Enterprise Resource Planning (ERP) systems that adequately manage their business processes.
A company’s ERP is central to its accounting and financial record-keeping processes. In manufacturing and distribution, it manages inventory and elements of logistics. Some businesses also use it to handle their human resources, product and customer data. By extension, ERP is therefore critical for decision-making and, as such, it tends to have a long life cycle.
Warning signs
There are some tell-late warning signs that the current system may be ‘broken’, such as the inability to handle multiple languages, currencies, legal entities and different reporting regimes. Or when the management doesn’t get the reporting information they need to make critical business decisions.
An outdated financial system can compromise much more than a company’s financial reporting. The system may not be up to the task of handling greater resource requirements in an increasingly more sophisticated supply chain setup. Would customers and suppliers take their business elsewhere? If this happens it’s probably because, with the current system, the business cannot meet their real-time demands. Also, if the business has to adjust the workflow to accommodate what its system is capable of handling, it may hold back production and lead to cashflow issues. An obsolete system may also be responsible for failures to operate in line with the latest changes in industry, VAT and corporation tax regulations. Aging systems become more and more expensive to maintain, too.
Evaluating the options
If the business encounters any of these problems, it’s likely that its current system may need replacing with a more appropriate ERP system. However, it’s important to first carefully evaluate both the existing system and the likely replacement solution in the context of the company’s current and future business requirements.
CFOs and FDs should be able to assess:
When it comes to choosing a new ERP platform itself, most vendors offer a choice of on-premises, Software as a Service or cloud-based services. However, more and more companies are now opting for cloud ERP, to take advantage of the flexibility and agility that results from centralized data storage, sharing of data-processing tasks and internet-based access to services and resources.
It’s essential to make a clear and specific list of new system requirements before looking at vendors. The management must carefully consider the reporting and metrics, too:
Getting the acceptance from the board
Those benefits can be considerable, however financial systems are expensive so the CFOs and FDs may find it difficult to secure support and funding from the board. They are often viewed as back-office enablers, not as strategic investments that can create value for the company. It’s therefore crucial that CFOs and FDs shift the conversation from ‘cost’ to ‘benefit’ by demonstrating what greater efficiencies and incremental value the new system will provide.
Planning the implementation
Once the board gives the go-ahead, the migration from one system to another needs careful planning. An ERP implementation affects every business function and if it fails, it can have disastrous consequences for the whole organisation.
There must be a formal implementation plan in place. Everyone involved needs to be clear on their areas of responsibility, and there must be a project manager (such as an experienced CFO) to ensure that the project is completed on time and on budget.
A roll back strategy is also required, in the event that something goes wrong. The new system needs extensive testing, too. It isn’t enough for the software provider and the IT team to carry out functionality testing – the CFO or FD will also need to ensure that business level testing is performed. Finally, before deployment, the company’s staff will most likely need training.
Not planning and not managing the project rigorously means there’s a real danger that the implementation will fail, with serious financial consequences for the company.
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