ERP vs. Traditional Accounting Software

ERP vs. Traditional Accounting Software

How does an ERP system compare to traditional accounting software? and why might an organisation move from a SAAS offering such as Quickbooks or Xero to a fully-fledged ERP solution?

This article looks at the differences between an ERP system and accounting software and discusses which one might be the best fit for your organisation.

What is an ERP system?

ERP stands for Enterprise Resource Planning. It is a class of software used by organisations to increase the efficiency of workflows. It does this by: 

  • Digitizing and automating workflows
  • Real-time performance tracking and analysis
  • Integrating workflows across the organisation 
  • Management of workers, technology, and inputs across an organisation
  • The sharing of information across an organisation

ERP software provides a platform and central database across a whole organisation. It comprises core functions that can be added to as needed with specialty modules and integrations to other software. 

ERP software developed from (Material Resource Planning) systems in the 1980s. It was mostly used in the manufacturing industry. Today it is a broad-based application used throughout organisations and across different industries.

What are the core functions of an ERP?

The core functions of ERP software include:

  1. Accounting – The tracking of expenses and revenue in real-time. Invoicing and bill management. Traditional bookkeeping and financial reporting. Payroll.
  2. Supply Chain Management – The management of the flows of goods and services into and out of the organisation. It includes the management of supplier relationships, inventory, finished goods, and fulfillment. For example, you can use supply chain management to determine when you may next need to order a specific input to ensure adequate supply for uninterrupted production.
  3. Human Resource Management – The management of workers including on-boarding, performance management, compensation, and payroll.
  4. CRM (Customer Relationship Management) – A codified and automated workflow for turning prospects into customers and keeping those customers happy. Customer interactions can be recorded at every stage and are available for any department that works with customers. When customers ring your helpline, your staff member will have a full history of their relationship with your organisation.
  5. Business Intelligence – The tracking and analysis of operations and KPIs. This can be done in real-time using dashboards or through regular or ad hoc reports.

What are the key features of an ERP?

  1. Digitization – Given its broad scope and ability to customize, ERP software allows organisations to codify tasks and workflows. Paper checklists and trails are replaced with digital interfaces, prompts, and tracking.
  2. Automation – When workflows are digitized repetitive tasks can be automated. For example, a sales team can be automatically alerted to contact a lead after they engage with marketing.
  3. A single platform – All departments interface with ERP software using a single platform. Different functions and access can be assigned to groups or individual users.
  4. Central database – All ERP data is stored in a central database, which allows data to be accessed across an organisation.
  5. Tracking and visibility – ERP software provides visibility of workflows across an organisation. The executive team can track the performance across departments and functions. Departments can check on workflows in other departments that affect them. This can be done in real-time or through regular reports.
  6. Integration – Given that ERP software handles most activities within an organisation, it allows management to integrate workflows across an organisation and to reap increased efficiency.
  7. Flexibility – ERP software provides a range of core functions but additional modules and integrations with other software help accommodate any specific industry or organisational requirements.

What are the main benefits?

The two main benefits of ERP software are:

  1. The increased efficiency of workflows within individual departments
  2. The increased efficiency for the organisation as a whole from the integration and tracking of workflows across departments. 

How much does an ERP cost?

ERP software is expensive and is normally used by larger organisations. But a number of ERP software vendors are providing entry-level offerings that will scale with SMEs as they grow.

ERP software typically comprises a one-off implementation cost, and a licensing fee or an ongoing subscription cost (SaaS).

For SMEs implementation costs can range from $75,000 to $750,000. Costs for larger organisations can range from $1 million to $10 million. This typically includes consulting services, customizations, and some training from vendors.

Dedicated IT staff may also be required to oversee complex ERP setups.

Who uses it?

Larger organisations are the main users of ERP software. With their size and complexity, ERP software provides them with a complete solution. Customizations, modules, and integrations also allow them to tailor ERP software to their specific needs.

What is Accounting Software?

Accounting software helps organisations manage their finances. It:

  • Records financial transactions
  • Tracks financial performance
  • Generates the standard financial reports, i.e. Balance Sheet and Cash Flow Statement.

Modern accounting (Double-entry bookkeeping) was invented by a Venetian monk in 1492.

Big American companies began to use computers for payroll and electronic interchange after World War Two

Accounting software for SMEs was first developed in the late 1970s. Peachtree was the first accounting software (1978). 

The first computer spreadsheet, VisiCalc, was invented in 1979. It gained widespread success when included with the Apple II. It was superseded by Lotus 1-2-3 in 1983, which in turn was superseded by Excel and Microsoft. 

From the late 1980s, well-known accounting software began to emerge e.g. Quickbooks, Quicken, etc. 

Today, accounting software continues to grow in sophistication and has become cloud-based. Accountants can now work with their small business clients in real-time. It is also now easier for accounting information to be shared across an organisation.

What are the core functions of accounting software?

Accounting software includes all the core accounting functions, such as:

  • Accounts receivable
  • Accounts payable
  • Financial close
  • Time and expense capture
  • General Ledger
  • Fund accounting
  • Project accounting
  • Revenue recognition and management
  • Standard financial reporting

Some accounting software also includes:

  • Payroll
  • Inventory management
  • Invoicing

What are the key features?

  1. Automatic calculations and totaling – We take this for granted but prior to accounting software and spreadsheets, totals had to be calculated for each ledger and account.
  2. Automated journal entries – When financial transactions are entered, journal entries are automatically created.
  3. Tax compliance – Most accounting software takes into account local tax rules to ensure compliance.
  4. Budgeting – Users can create budgets and track actual spending versus budgeted amounts.
  5. Links to bank accounts – Most accounting software can now link to an organisation’s bank account. This allows automatic recording of transactions.
  6. Integration and automation of invoicing, billing, and inventory – Data can be automatically passed from one system to the other.
  7. A cloud-based platform – Most major accounting software is now cloud-based. This makes it easier for internal users and external stakeholders to access the software and their organisation’s financial information across locations.
  8. Financial Analysis – In addition to the standard financial reports, accounting software can also provide more detailed and frequent financial analysis.

What are the main benefits?

Compared to manual bookkeeping and computer spreadsheets, accounting software streamlines the accounting work for an organisation. Totals are calculated, checked, and passed between accounting functions. This eliminates errors and saves time on data entry. It also reduces the number of bookkeepers required by organisations and the amount of work performed by their external accountants.

Accounting software also generates mandatory financial reports. 

It also provides more frequent financial analysis to help an organisation manage its finances and to make decisions.

How much does it cost?

Accounting software is purchased via a license or a per-user monthly subscription fee (SaaS).

License fees start from around $95. Monthly user fees range from $9 to $1,000+ depending on the advanced features of the software and the size of your organisation.

Who uses it?

Most SMEs use accounting software. Larger firms may also use it or may use ERP software instead.

Differences between Accounting and ERP software

  1. Scope – This is the key difference. Accounting is one of several functions within ERP software. ERP software provides a range of functions and capabilities that can touch every function within an organisation, particularly when you include add-ons and integrations. This includes supply chain management, inventory, manufacturing, CRM, and accounting. Accounting software is far more limited in scope. In addition to accounting, it typically only provides payroll and inventory management functions.
  2. Time-Focus – Accounting software like accounting itself is focused on the past. It tells you how your organisation performed in the period just finished or in previous periods. In contrast, ERP software provides real-time data on company workflows as they are happening.
  3. Flexibility – ERP is a flexible solution that can be expanded in scope with modules and integrations. It can start small and grow with your organisation. For example, maybe you buy ERP software to help you improve workflows between departments but then, later on, use it for CRM. In contrast, the scope of accounting software is relatively fixed.
  4. Cost – ERP software tends to be more expensive because they cover a whole enterprise and have more functionality. It tends to be used by larger organisations.
  5. Users – By design, an ERP will accommodate a range of users across an enterprise with differing degrees of expertise. To enable this, ERP interfaces tend to be intuitive and customizable. In contrast, accounting software is generally only used by finance departments within organisations.
  6. Complexity – The downside of greater scope for ERP software is greater complexity. It typically takes longer to set up than accounting software. It may also require dedicated IT staff to oversee it. In contrast, accounting software is more likely to be off-the-shelf.

Which type of software is best for your organisation?

ERP provides more functions to help your organisation but is generally more expensive and complex to implement. As a result, the answer is really ‘it depends’. An SME looking for a simple accounting solution for reporting transactions, costs etc should logically just choose accounting software. But if you are an SME that is expecting to grow or are a larger organisation that needs to manage inventory movement, and other aspects not covered via typical accounting solutions, then an ERP is a logical upgrade to consider.

Conclusion

ERP software does more. It can do everything accounting software can do plus much more. The reason that accounting software remains competitive is that smaller organisations may not need all the functionality of ERP software or cannot afford it. Accounting software has also been around for much longer and is more understood among SMEs.

As ERP offerings for SMEs increase, the niche for accounting software will continue to decrease.