ERP in Financial Management
The ERP finance module is the software component that handles the main accounting and financial management functions of an enterprise resource planning system. It contains standard accounting records, such as the general ledger (GL) and balance sheet; generates financial reports; and handles related transactions, such as invoicing and expense reporting. The ERP finance module, which is also referred to as ERP core finance or financial management, also commonly supports functions such as profitability analysis and revenue management.
ERP is modular software designed to integrate an organization’s business processes into a single system running on a central database. The finance module shares data with other core business functions, including inventory management, production planning, purchasing, customer relationship management (CRM) and others. When a transaction in one of these other modules has a financial impact or must be recorded in the accounting system, it usually triggers an action or transfer of data in the ERP finance module.
Why are ERP finance modules important?
The finance module is usually the first component activated in an ERP system and the reason organizations replace their standalone accounting software with ERP. Integrating the finances of the various business functions helps ensure accounting accuracy, which is essential in meeting financial regulations and reporting requirements that have grown more stringent in recent years. It also provides the consolidated financial data needed to measure and improve corporate performance.
The finance module is also the component that most differentiates ERP from other integrated business applications, such as human capital management (HCM) suites, and from its predecessor, material requirements planning, which mostly addresses the raw materials and components needed in manufacturing. It is the one truly essential ERP module and often serves as the vanguard of deployment when a company changes ERP systems or expands to new locations.
How Does an ERP Finance Module Work?
An ERP finance module is designed to gather financial data across your enterprise. Then, it uses that information to generate reports for employees, vendors, partners, and customers.
The finance module within your ERP system is designed to “speak” to other core business functions within your organization. When any type of financial activity occurs in another module, it will trigger a response in the ERP finance module. This includes any activity that affects:
- Inventory management
- Materials purchasing
- Production planning
- Customer relationship management (CRM)
This business-wide collaboration illustrates how ERP financial software differs from ERP accounting software. An ERP finance module includes dedicated tools that help business leaders use financial data to inform future decisions. With these insights, they can create budgets, forecasts, and plans.
Conversely, accounting software relies mostly on current and historical data.
As you evaluate ERP vendors, it helps to know which ERP modules could benefit your finance department. Let’s look at a few of the top tools that you’ll find in most systems.
1. General Ledger Management
Your general ledger contains a complete and detailed record of all your company’s financial transactions. When this information is stored within your ERP system, you can access and track valuable information, such as:
- Income and expenses
- Assets and liabilities
- Capital accounts
This data is stored in one central location, making it easy for employees to obtain the up-to-date information they need.
2. Profit Tracking
It can be challenging to get a complete view of your company’s financial health. With so many resources at your disposal, you may wonder if you’re making the best use of them.
A profit tracking tool, or a profitability analysis tool, lets you clearly see where your profits originate.
You can also use it to gauge the return you’ve received on any investment you’ve made for your company. This is possible with advanced trackers that use data from incurred costs, as well as receivables, to analyze how profitable your actions and decisions are.
3. Cost Tracking
In order to track profits, you need to track costs. With an ERP financial management system, you can take a bird’s-eye view of your different cost centers. How is your business spending money and where are you focusing most of your investments?
With insights into both profits and costs, business leaders can understand the specific changes they need to make to swing the pendulum in the right direction. They can analyze the best next move based on their current and projected data, as well as the current competitive environment.
4. Accounts Payable (AP) and Accounts Receivable (AR)
By automating both AP and AR, an organization can minimize the risk of human error, track critical financial activities, and simplify transactions.
For instance, companies can use ERP software to automate their collection process, which makes it easier for customers to pay on time and in full.
At the same time, users can access the AP function to clearly see how much they owe others, and when those payments are due.
5. Fixed Asset Management
How do you currently track and manage all the fixed assets your company owns? This can be a cumbersome task, especially for large companies.
ERP financial management software helps users keep track of their equipment, computer hardware, vehicles, and more. With this knowledge, they can keep track of how those assets depreciate over time.
They can also track how they’re using those assets and how much they’re spending to maintain and upkeep them.
6. Risk Management
There can be both known and unknown risks to an organization’s financial stability.
Obvious liabilities include late or missing payments, which can affect your cash reserves.
Then, there are less-obvious risks that can affect the security, compliance, and reputation of your company.
An ERP finance module can help you forecast, analyze, and manage these issues before they materially disrupt your business. This allows you to take a proactive approach that strengthens financial and operational stability.
7. Financial Reporting
While most financial reports are reserved for internal use, some companies may need to generate them for external partners and regulatory bodies. In these cases, it helps to have in-depth reporting.
Advanced ERP finance modules use machine learning and business intelligence (BI) to give users an in-depth look into every facet of their financial performance. These findings are made easy to understand via graphical tools that illustrate details such as actual sales, projected sales, and recommended next steps.
