What is enterprise resource planning (ERP)?

Enterprise resource planning (ERP) software centralises information across a business to automate its processes and speed up decisions.

While traditionally aimed at larger enterprises, ERP systems are increasingly beneficial for small and medium-sized businesses.

What is an ERP system?

An ERP system links software from across the business so that data is shared between them. This is increasingly valuable as businesses turn to multiple niche software products to help manage business functions. ERP integrates these applications to create a single source of truth about what’s happening in the business.

How ERP solutions work

ERP software is often run in the cloud and connects with other software applications used by the business. Ideally it will have two-way communication, allowing the ERP to suck data into a central location and push important new data out to connected applications. It should also reconcile data from different sources to ensure there is a single set of agreed numbers for the business to consider.

Business functions that feed into ERP systems

  • Finance and accounting: including accounts payable and receivable, cash flow, asset and liability management, taxes and financial reporting
  • Billing: including invoice creation, invoice reconciliation, and aged receivables reporting
  • Human resources and payroll: including rostering, time-recording, training, performance management, and payroll
  • Supply chain: including procurement, inventory management, production planning and logistics
  • Customer relationship management (CRM): including lead tracking, transaction history, and sales activity reporting

ERPs can be tailored to specific industries and businesses.

The benefits of an ERP system

As a virtual nerve centre for the business, an ERP system creates four core benefits for just about any business type.

1. Centralised data

ERP systems consolidate and reconcile data from across the business in almost real time. This reduces duplication and transcription errors, while giving decision makers a consistent set of truths to work with.

2. Improved decision making

A central database makes it easier for decision makers to find the information they need. It also allows managers to do more thoughtful analysis by finding relationships between data points that would previously have been housed in different locations.

3. Automation

ERP software automates repetitive tasks and streamlines processes. For example, it can be used to automate things like reporting, customer outreach, stock management, or marketing campaigns.

4. Increased productivity

Improved analytics, informed decisions, and automation all help reduce waste in the business and increase productivity.

Getting started with ERP

A small business can use an online ERP solution to integrate software across the business. The cloud provider will typically take care of security, updates, and maintenance, while billing customers on a subscription basis.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.