Cost of ERP is an Asset, Not an Expense
ERP Cost is an Asset Not an Expense. Anything and everything you invest in your business must offer you a return
Anything and everything you invest in your business must offer you a return. Businesses have to think of options that would provide them with a better profit margin and productivity in the near future. Most small and medium-sized businesses today have to focus on how they can improve their business strategies using various tools and resources that they can find in the market. ERPs have become an integral part of the business. However, you have to think of ERP implementation cost-effectiveness before you actually incorporate ERP in your business.
Technology has transformed the way we interact and do business today. Hence, you need to make use of different technologies that you can find. With the right technology, you can get the best experience and returns. Unlike other regular accounting software, ERP integrates different department functions into a single platform. However, it is also important that you focus on phases of implementation and the cost-effectiveness of the ERP implementation to be on the safe side. This would ensure that you are able to make the most of the choices you make for your business.
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Understanding Capital Expenditure (CAPEX)
When you are thinking of ERP implementation cost you need to think of more factors than just the money you are spending. In the finance terms, capital expenditure also known as CAPEX funds focus on acquiring, upgrading and maintaining physical properties, buildings, and equipment. So, basically, any money you spend on buying new software or equipment or renovating your office falls under capital expenditure. Hence, anything that you buy to improve the situation of the current asset is capital expenditure.
Hence, when you are thinking of implementing ERP you need to think of cost-effectiveness of the ERP implementation that would ensure that you are able to spread the cost of the expenditure over the entire useful life of the asset. Often, businesses confuse capital expenditure with operational expenses which are short-term costs for maintaining ongoing operational activities.
Understanding Operational Expenditure (OPEX)
Additionally, when you are thinking of ERP implementation cost you also have to think of the operational expenses (OPEX) of the software. In simple terms, an operational expense is anything that you need to spend in a short-term to keep the business operational. For instance, the inventory costs, rent, marketing expenditure, payroll, insurance, and the research and development cost all fall under OPEX. While businesses have to think of ERP implementation cost effectiveness they also have to think of how they can reduce the operational expenditure without degrading the quality and the company's performance and productivity in comparison to the market competition.
With the right cost-effectiveness of the ERP implementation, you can significantly reduce your operational expenditure and ensure that you can increase your earnings. Unlike CAPEX, OPEX is necessary because it allows you to manage and maintain your business functions smoothly. Hence, reducing your OPEX drastically can impact the quality and integrity of your business operations.
ERPs are important for businesses and therefore you have to be sure that you take into consideration the ERP project cost estimation. This would allow you to keep your budget under control and focus on how you can use your capital expenditure in the right way and also reduce your operational expenditure in the short-term. It is, therefore, important that you focus on how you are going to manage phases of ERP implementation which would also manage the cost.
ERP implementation cost can vary depending on what you want for your business and how you are going to work on incorporating it into your business. Hence, you need to pay close attention to the phases of ERP implementation that can help you with ERP implementation cost effectiveness. Here are some of the factors that you can keep in mind when you are thinking of incorporating ERP in your business in the near future.
A lot of work goes into implementing ERP in the right way for the business. Hence, you have to be sure that you focus on how you are going to choose factors that can keep up with your ERP project cost estimation.
Choosing the right ERP is going to be the key and therefore you must be sure that you pick the right ERP that can help you achieve cost-effectiveness of the ERP implementation.
Software License Expenditure
Choosing a proprietary ERP is going to cost you more than open source ERP. Hence, you have to take into consideration the choices you have. It is important to choose wisely between proprietary ERP and open source ERP based on your business requirement and budget. A licensed ERP implementation cost is going to be more and therefore you have to be prepared for it. In most cases, there will be an annual or monthly licensing cost that you have to bear. The ERP project cost estimation would differ based on the number of users you have. Hence, you have to keep that in mind while you are looking for the cost.
Your business ERP implementation cost would also depend on the overall infrastructure cost. If you are hosting the software on your own infrastructure it would cost you less, but you might have to pay more if you are choosing a cloud or hosted service from an external vendor. In both the scenarios, the ERP project cost estimation would be similar. Hosting the ERP on the cloud may cost you slightly higher than your own infrastructure, but there are several advantages of cloud hosting in terms of backup and performance reliability.
ERP Module Cost
While you are focusing on different phases of ERP implementation you need to keep in mind that most ERPs have different modules for different processes. Hence, you have to be selective about the modules you choose and how it will allow you to integrate different departments. Connecting the whole business is going to be the key and therefore you must keep that in mind when you are thinking of cost-effectiveness of the ERP implementation.
Once you are done with choosing the ERP software for your business you need to think of how you can focus on the ERP implementation cost. Hence, you need to look at factors that will impact the ERP project cost estimation.
Implementing ERP in your business will require some expertise and this is where the consultants come in. ERP consultants or partners will usually do a research to ensure that all the gaps are filled during the phases of ERP implementation. The input and the feedback consultants provide will offer better cost-effectiveness of the ERP implementation in the long term but will cost you initially.
Once the consultants have provided their input it is time for customizing the ERP software to meet your business requirements. Various customizations and integrations are done during this phase. Hence, you have to be sure that you don't go overboard as that will drive up your ERP project cost estimation. Additional coding and development work will only ruin your ERP implementation cost-effectiveness in the future.
Once the ERP software is implemented in your business it is time for your employees to get the right training. The training period is one of the critical phases of ERP implementation because it also involves the time of the consultants and your employees. The software implemented must be functional and in alignment with the workflow of your business to provide better productivity and profit.
The maintenance cost can impact your cost-effectiveness of the ERP implementation in the long term. Hence, you need to ensure that you are spending wisely when it comes to maintaining and upgrading your systems. While you have to be sure that you don't invest heavily you also have to balance out your ERP implementation cost by regular maintenance and upgrades.
ERP software is a capital investment (CAPEX) that will help you in reducing your labour cost, minimizing manual errors and integrate different business functions by automating it. All this will allow you to make your business more efficient and productive. Hence, you will see the benefits of ERP implementation cost-effectiveness in the long-term. The reason for ERP implementation in the first place is to improve the current situation of your business.
In most cases, any new implementation will have a hitch that will be resolved gradually. Hence, the focus must be on how you can keep the ERP implementation cost under control and implement the better functionality of the ERP software. The focus must also be on choosing the right ERP program that suits your business needs and budget. One of the FrontRunner ERP's as per Gartner Methodology is ERPNext. To know more about ERPNext look at www.erpnext.org and User forum at https://discuss.erpnext.com.
Also, Selecting the right ERP consulting partner can also help you to reduce your ERP project cost estimation as they can provide you with services that are well under your budget. For ERPNext, Service providers in the community including FinForce may be hired for Cost-effective ERPNext implementation.
You can also manage the development cost of the ERP by tweaking your business processes rather than the ERP system. The training and the management of the ERP system are important for any implementation and will impact your ERP implementation cost-effectiveness in the near future.
Liyakat is Chartered Accountant and Diploma holder in management accounting, CIMA, UK. He is an avid reader and loves running and participated in marathons. He is a partner at FinForce Consulting.