The Buyers Guide to Cloud ERP Software - Chapter One: Core Business Management Capabilities

In part one of our new nine-part guide to buying cloud ERP software, we take a look at the importance of core business management capabilities.

Managing your company’s financials is the backbone of your business and is vital to the long-term health and viability of your company. To continue applying the necessary financial rigor to support your business, the accounting department needs the right tools to most efficiently do their job. Without tools to handle the business and regulatory requirements, accounting staff waste time on manual and duplicative work while closing the books every month.

When spreadsheets and workarounds become the norm for your finance department, you know it’s time to upgrade your financial management solution. Your financial close times and audit preparations take too many weeks to complete and sales that occur on the last day of the quarter often do not get entered into the system, thereby not getting recognised as revenue on time. Critical financial processes such as handling financial consolidation, multi-state and country taxation, and reporting based on multiple currencies become a huge productivity drag on your entire department and are plagued with errors.

Add on regulatory requirements such as revenue recognition and constantly changing accounting standards across countries you’re operating in, and the pressures get compounded. If any of these scenarios sound familiar, it’s time to take a hard look at how your existing business systems may be hurting your bottom line.

This business guide outlines the nine essentials of a complete financial management system and how the right solution can help you keep up with the rapidly changing business world.

Core Business Management Capabilities

Accounting Functionality

Every business management system needs to have basic accounting functions such as general ledger, accounts receivable, accounts payable, tax, cash and payment management with an audit trail built in. Beyond basic accounting functionality, your financial management system must be extensible to accommodate future growth while simultaneously allowing you to keep an eye on the bottom line. For example, Hard Dollar, an architecture and design firm, was able to obtain a 278% year-over-year profit growth with NetSuite’s cloud financial management system while reducing administrative costs by 20%.

You need your financial management system to allow a virtually unlimited amount of general ledger accounts and sub-accounts to be provisioned. It must allow you to define your own accounting periods and let you close individual components separately to match the needs of any new subsidiaries and international divisions that you may introduce. And finally, it must have predefined charts of accounts for a wide range of industries to help with quicker deployment. Without these essential accounting functions, it becomes very hard for your finance staff to monitor the multitude of cost centres within your company and ensure that you are operating within your set budget.

“The NetSuite platform allows us to gain greater visibility into our supply chain and order management, while seamlessly automating tasks that previously took days to process.” Chris Green, Senior Product Manager, eve sleep

Cash Flow Management

One of the keys to managing your financial health is your ability to monitor your cash flow carefully on a regular basis. At times of unexpected change, you may face unexpected costs for permits, licenses, raw materials, equipment, extended contract work, and vendor agreements to name a few. These investments often require large upfront payments and smart financial planning to keep cash flow positive. If there isn’t enough cash on hand to meet any one of these obligations, it could result in repercussions for your company, threaten its performance and even expose it to legal liabilities.

To avoid these potential pitfalls, it is vital that your cash inflows keep pace with your cash outflows. Your business management system should allow you to perform cash flow analysis to examine the components of your business that affect cash flow, such as accounts receivable, inventory, accounts payable and credit terms, to name a few. By performing cash flow analysis on these individual components, you’ll be able to more easily identify cash flow problems and opportunities for improvement.

Real-time visibility is important in making timely informed decisions. When information can be accessed instantly from almost anywhere, without wasting resources on data extraction and tying data from different sources together, employees can make more accurate, faster decisions. By having greater real-time visibility into your cash flows through detailed dashboards and key performance indicators (KPIs), you’ll be alerted to discrepancies and “red flag” situations a lot more rapidly.

Recurring Revenue and Revenue Recognition Management

Running a business with a predictable revenue stream is difficult in uncertain times. But once you establish a stable customer base, you need to focus efforts on extracting ongoing revenues from these customers and increasing your customers’ value to power your next stage of growth. Close coordination between finance, sales, and service is necessary to identify recurring revenue streams, and define the periods of chargeability for services rendered and when revenue can be recognised on your company’s balance sheets. Your financial management system needs to be able to handle and report on these varieties of recurring revenue scenarios.

When identifying potential recurring revenue streams, it is imperative to know your company’s “cost to serve”. Your business management system should be able to accurately model different chargeability scenarios and get a handle on direct and indirect customer costs—acquisition costs, service costs and product delivery costs, as well as which customer segments drive margin, and which do not. The old adage that 20% of your customers generate 80% of your profits is particularly important with recurring revenue, because the remaining 80% of break-even or marginally lossmaking customers may be costing you year after year unless you smooth out profitability across your customer base.

It is also important to have good revenue recognition processes in place. Your billing infrastructure needs to be able to handle multiple pricing schemes for different customers. You may be managing different payment terms, whether monthly, quarterly or annually, and may be billing customers in advance, in arrears, or prorating them on partial months. Using spreadsheets can quickly get out of hand, and different or one-off billing arrangements can throw things off and result in billing errors. A business management system with robust billing capabilities ensures that you are able to manage your subscription-based billing plans easily and accurately. It can even turn billing into a competitive differentiator by allowing your customers to change their billing plans and payment options, thus improving customer satisfaction and lowering attrition.

While billing processes greatly aid with revenue recognition, a business management system should also help you comply with FASB, AICPA and IFRS regulations regarding revenue recognition. Your financial system should feature built-in support for key revenue recognition rules such as SOP 81-1, SAB 101, EITF 00-21, EITF 08- 01 and EITF 09-03 to enable you to recognise revenue for multielement sales, and to recognise them at different rates.

These revenue recognition rules bring with them a whole set of complicated calculations that your finance staff must perform. A financial management system that incorporates support for flexible revenue recognition will ensure that your staff reduces their dependence on multiple spreadsheets and error-prone manual processes. Such a system also helps ensure that you gain clear visibility and continual monitoring for all aspects of the revenue recognition process, and that you are positioned to manage.

Support for these revenue recognition rules is especially important because these regulations can allow companies to recognise revenue much sooner. Before the advent of these regulations, if you were unable to determine the fair value of any of the items that were part of a sale, you had to defer the revenue for those items until they were delivered sometime in the future. However, these regulations allow you to apply an Estimated Selling Price (ESP) for items not yet delivered and recognise their revenue a lot earlier. These regulations thus have a material impact on your revenues and consequently are very important to your bottom line.

Financial Planning and Reporting

To accurately plan and forecast future costs for various initiatives, your financial management system should give you deep visibility into the current state of your company’s operations so that you can identify problem areas.

Financial planning involves pulling together data from several departments within your company to gain a comprehensive view of your operations, and then modeling several “what-if” scenarios to assess the impact of different cost structures. Without a financial management system that allows you to easily perform these functions, your finance team will end up wasting time consolidating data as well as projecting results from all of those different scenarios on a regular interval from various systems instead of performing strategic analysis.

Financial reporting for compliance purposes is extremely important in today’s highly regulated environment. Regulations such as Sarbanes-Oxley, Dodd-Frank and numerous GAAP standards must be adhered to strictly. In this kind of environment, it is very important that your monthly reports, performance reporting and financial close be impeccable in case you are ever audited. This is a major reason why it takes so long for many companies to close out every quarter. A financial management system that can withstand regulatory scrutiny, accelerate financial close and produce key financial reports on demand offers a tremendous competitive advantage.

A robust system should also allow your finance staff to dynamically drill through from data entry sheets or budget reports directly into underlying transactions and the evidence supporting those transactions, providing deep and unparalleled insight into your business. It would also allow your team to monitor any financial measures according to their role - whether controller, finance manager or analyst - through customisable dashboards and KPIs.

When it comes to financial planning, your budgeting and forecasting functionalities rank at the top of the list, especially because of their focal role in controlling costs. Your financial management system needs to enable multidimensional data collection and automate the consolidation of plans so that you can clearly look into the costs for personnel, sales, capital equipment and more. Automation also improves accuracy and reduces errors by eliminating broken links and formulas.

A key best practice within financial planning is to compare actual data with plan data. With spreadsheet-based planning, integrating actual data into budgets, forecasts or what-if scenarios is cumbersome, and subsequent variance analysis is nearly impossible. Financial management systems with best-in-class budgeting and forecasting capabilities seamlessly integrate year-to-date actuals with future expectations and allow you to perform variance analyses to compare actual results against budgets.

Fixed Asset Management

As your company matures, you may acquire a variety of fixed assets such as equipment, land and buildings. You need to be able to maintain and control the complete asset lifecycle of all your fixed assets, from creation to depreciation, revaluation and retirement, so that you can get a better view of how this affects your bottom line. Accordingly, a business management system must have detailed asset management functionality and support multiple depreciation calculation types. It needs to handle both depreciating and non-depreciating assets, maintenance schedules and insurance. It must also tightly weave your asset acquisition process into your accounting processes to help ensure that no equipment slips through the cracks.

There are several methods of depreciation, and each method has a different set of advantages and disadvantages. Your financial management system should allow you to use any of the standard depreciation methods including straight line, fixed declining, sum of years’ digits, asset usage and even your own user-defined depreciation methods.

Strong management of your fixed assets can help you benefit from tax deductions related to the depreciation of your assets. These deductions only serve to help shore up your cash flows so that you can reinvest the proceeds into your business.