Fig. 1: ERP’s sphere of influence
Aims of ERP systems
The aim behind an ERP solution is to bring together all areas in a single, comprehensive system. Ideally, a company’s industry-specific processes will also be considered. If used correctly, an ERP system can give management a complete insight into important aspects at the enterprise. The process involves monitoring both department-specific information and data from across the enterprise. ERP systems make communication and collaboration between departments easier and allow tasks to be taken care of efficiently and smoothly.
A practical example makes it easier to understand the benefit of this type of software: For instance, an ERP system allows a car manufacturer to track materials from the procurement phase, through to production and the finished product that is already bought and paid for. The aim is to show how the resources available to the individual departments can be used in the most efficient manner possible and which approaches work best in the supply chain.
What does financial accounting mean?
Within enterprises, financial accounting is part of the company’s accounting system. Financial accounting records all corporate processes as financial data, thereby bringing transparency to expenses and income.
Creditor and debtor accounting as forms of financial accounting
Generally speaking, and especially at bigger enterprises, financial accounting is divided into creditor and debtor accounting.
- Creditor accounting:
- This includes the payment obligations and thus incoming invoices.
- Debtor accounting:
- This refers to outstanding balances, i.e. the receivables and outgoing invoices.
Financial accounting and its roles
Primarily, the role of financial accounting is to depict a company’s overall result. In other words, it shows the basic financial situation and any changes to it. It’s not just the management that needs to know how much of a profit or loss was generated. Other major stakeholders also include investors and creditors. A transparent profit and loss statement and balance sheet are intended to generate trust and show how vital the company is.
What can financial accounting software do?
Financial accounting software is tailored to these needs: It is used exclusively by finance departments and is essentially focused on the enterprise’s financial functions and transactions. It handles:
- Creditors
- Debtors
- Salaries
- Invoicing
- The process of creating a general ledger
The focus is on postings from all financial streams. The end result of financial accounting comes in the annual financial statements. This means that at the end of a defined financial period, the accounts are closed: Both a balance sheet and a profit and loss statement are generated.
The most common financial accounting software is capable of providing you with a snapshot of all financial transactions within the company. The aim is to accurately depict the company’s economic and commercial situation. Solutions for accounting, finance, and controlling are often included as a module in complex ERP systems, such as SAP.
Why an ERP system or financial accounting software is not sufficient for holistic corporate management
What are the crucial differences between a traditional ERP system with a financial accounting module and an all-in-one Financial Performance Management solution?
Difference 1 between ERP and FPM: The aim
ERP systems and FPM solutions are two entirely different things: While ERP systems address and reflect operational processes from all areas of an enterprise, an FPM solution allows management processes to be controlled better.
Many enterprises use ERP systems to gain full control over resources, processes, and projects. These include:
- Calculation of costs
- Mapping and organization of contracts and orders
- Controlling inventory status
- Planning projects
- Creating quotations
- Controlling equipment and plant status
- Analyzing performance and productivity
- Handling payroll and HR planning
Many companies initially begin with the implementation of a financial accounting or ERP system to handle their daily transactions. In finance departments, Excel spreadsheets are often created and used to implement financial processes such as budgeting, forecasts, and financial reports. But if the company grows and expands, Excel and similar solutions quickly reach their limits and holistic financial software is needed.
FPM solutions are about managing the enterprise’s overall strategic direction. They pull together all of the important financial data – from source systems such as ERP and financial accounting – and provide a basis for taking decisions related to the future development of the business.
Difference 2 between ERP and FPM: functionality
The different aims also mean that the functionality is different:
For ERP vendors, the focus is less on consolidation, planning, reporting, and analysis, and more on traditional ERP issues such as merchandise management and financial accounting. While it’s true that numerous functions such as budgeting and forecasting, complex financial consolidation, analysis, and reporting functions are included in ERP systems, in practice they are far too complex - making them inefficient for users. FI data are not sufficiently integrated and provide only limited insights. Generally speaking, planning with financial data is possible in ERP systems. But the focus is more on operational planning, which is not sufficient for sustainable corporate management.
When financial accounting solutions are used either on a stand-alone basis or as modules in ERP systems, the focus is on the creation of a profit and loss statement and balance sheet.
A distinguishing feature of FPM solutions, when compared to ERP and financial accounting options, is the integrated financial planning capability, straightforward consolidation, and reliable reporting: This allows actual and planning data to be visualized and analyzed in a transparent manner. These data form the basis for valid business decisions within the enterprise. It provides groups with a straightforward and efficient way to generate consolidated financial statements. In this process, financial data are usually integrated and consolidated from several different ERP and/or financial accounting source systems. The result is a single-point-of-truth, a reliable basis of data for the finance department.
Difference 3 between ERP and FPM: complexity
ERP systems are often very complex to implement and use. They usually take much longer to be introduced and integrated with corresponding third-party systems within the IT infrastructure. Staff training requirements add to the burden. A distinctive feature of major ERP vendors such as SAP is the wide range of functions that they offer. The systems can be tailored to meet the individual requirements. But this customizing of ERP systems requires a significant level of staff effort and time and also makes maintenance more difficult.
The following are some of the disadvantages of ERP, particularly in relation to consolidation, planning, reporting, and analysis:
- Overly high level of staff effort and time required for introduction
- Overly high costs for license, support, maintenance, and upgrades
- Overly high difficulty when customizing the system
- Overly high training requirements for users
- Heavy dependence on one vendor or the own IT department for modifications and maintenance
