What is an ERP?

ERP Definition

An ERP software, also known as an Enterprise Resource Planning system, is a platform used by organizations to manage and integrate important parts of the business process.

An ERP system includes software modules for various business operations such as accounting and financial management, human resources, manufacturing and production, supply chain management, inventory management, talent management, project management, customer relationship management (CRM), customer success and more. 

The primary purpose of an ERP system is to facilitate the flow of information between any business function inside the boundaries of the organization and to manage the connections to outside stakeholders.

Importance of ERP in Accounts Receivable

• Streamlines the invoicing process, automatically generating and sending invoices to clients, which speeds up the billing cycle.
• Improves cash flow management by providing real-time visibility into outstanding invoices and overdue invoices, enabling proactive follow-up with customers.
• Enhances customer payment experience by integrating various payment gateways and methods, making it easier for clients to settle their invoices.
• Reduces errors in billing and payments through automation, minimizing manual data entry and the associated risk of mistakes.
• Facilitates better credit management by tracking customer payment histories and credit ratings, helping with credit risk management.
• Enables efficient dispute resolution by keeping detailed records of transactions, communications, and adjustments, thus improving customer service and satisfaction.
• Improves reporting and forecasting for accounts receivable by offering detailed analytics on payment trends, aging reports, and cash flow projections.
• Automates reminders and collections processes, sending timely notifications to customers about upcoming and overdue payments, reducing the days sales outstanding (DSO).

ERP Vendor Examples

Here are some examples of popular ERP systems:

• SAP ERP
• Oracle ERP
• Microsoft Dynamics
• Odoo ERP
• Oracle NetSuite ERP
• Epicor ERP
• IFS Applications
• Sage Business Cloud

An ERP application caters to a wide range of industries and business sizes, offering business intelligence to meet different organizational needs such as human resource, information technology, human capital management, and risk management.

Types of ERP

Various criteria, such as the deployment model, size, and type of business processes, and the range of functionalities they offer, categorize an ERP tool in several ways.

Here are major ERP system categories:

On Premise ERP

• Description: Installed and operated from a client’s in-house server and computing infrastructure. It requires a significant upfront investment in hardware, software licenses, and IT personnel.
• Use Case: Suited for large enterprises that need customization and full control over the best ERP environments.

Cloud ERP

• Description: A cloud ERP is hosted on the vendor’s servers and accessed through a web browser. Modern ERP systems reduce the need for an in-house IT staff and upfront costs.
• Use Case: Ideal for small to medium-sized businesses (SMBs) or any organization looking to scale quickly without significant hardware investments.

Hybrid ERP

• Description: Combines elements of both on-premises and cloud-based systems, allowing businesses to keep some data on their own servers while leveraging the cloud for other functionalities.
• Use Case: Useful for companies transitioning to the cloud or those with specific needs that require a mix of both models.

Open Source ERP

• Description: Source code is freely available for customization and improvement by the company using it or a community of developers.
• Use Case: Best for organizations with the IT capability to customize and maintain their own ERP system or those looking to reduce licensing costs.

Industry-Specific ERP

• Description: Designed with features and functionalities specific to certain industries (e.g., manufacturing, healthcare, retail).
• Use Case: Ideal for organizations in sectors with unique processes and compliance requirements not fully addressed by a general ERP solution.

Small Business ERP

• Description: Tailored for small businesses, focusing on the most essential ERP functionalities like accounting, inventory management, and customer relationship management (CRM) in a more simplified and cost-effective package.
• Use Case: Small businesses seeking to streamline their core operations without the complexity and cost of a larger ERP system.

Tier 1, Tier 2, and Tier 3 ERPs

• Description: Classified based on the size and global reach of businesses. Tier 1 ERP module caters to large global enterprises with complex needs. Tier 2 ERPs serve medium to large businesses with regional focus. Tier 3 ERPs are for small to medium-sized businesses with less complexity.
• Use Case: Organizations choose among these tiers based on their size, budget, and specific needs.

ERP and Accounts Receivable Software

Accounts Receivable Software

• Focused Functionality: Accounts receivable software specializes in managing and automating the accounts receivable process, including payment tracking, collections, and cash application.
• Efficiency in Receivables Management: These systems streamline the accounts receivable process, reduce DSO, and improve cash flow.
• Customer Payment Experience: They often offer features like online payment portals, automated reminders, and digital invoice presentment to enhance the customer payment process.
• Integration Capabilities: While primarily focused on receivables, AR software can often integrate with other financial management systems, including ERPs, to ensure data consistency and accuracy.

Intersection and Complementarity

• Complementary Roles: In organizations using both, the AR software can complement ERP implementation by providing more specialized tools and functionalities for managing receivables more efficiently.
• Data Integration: For businesses prioritizing streamlined financial operations, AR software with ERP Integration can enhance data accuracy, visibility, and the overall management of financial processes.