Is It Your ERP System, or How Your Business Is Using It?

What business owners should be asking when their financial systems aren’t keeping up with their operations.

For owners of complex, project-based businesses, an Enterprise Resource Planning (ERP) system is often one of the largest investments in their financial and operational infrastructure. The expectation is that it will connect accounting, purchasing, inventory, labour and project management, providing reliable information to help run the business.

Yet many business owners remain frustrated with the financial information they receive, despite investing significantly in their ERP.

Project profitability is difficult to determine, financial reports take too long to produce, and employees still rely on spreadsheets to manage information that should be available within the system.

When these frustrations persist, it’s reasonable to question whether the business has outgrown its ERP. However, there’s another possibility worth exploring before committing to a costly replacement: the system may be capable of delivering what the business needs, but the organization isn’t using it effectively.

Understanding the difference can save a business considerable time, money and disruption while revealing opportunities to improve financial performance.

A Cobourg Example: When the Numbers Don’t Tell the Whole Story

Consider a hypothetical custom industrial equipment manufacturer in Cobourg, Ontario. The company has grown substantially over the past decade, taking on larger contracts involving engineering, procurement, fabrication, assembly and installation.

It has an established ERP system that processes transactions, tracks job costs and produces monthly financial statements. From an accounting perspective, the system appears to be functioning.

However, the owner is becoming increasingly frustrated with the lack of visibility into project profitability.

A $2.4 million contract was originally estimated to generate a 20% gross margin, representing $480,000 in expected gross profit. Several months into production, the project has experienced engineering changes, higher component costs and additional labour requirements.

The ERP reports costs incurred to date, but project managers maintain the latest estimates of outstanding purchasing commitments and remaining labour requirements separately.

By the time finance consolidates the information, the project is now expected to generate only a 10% gross margin. The business has effectively lost $240,000 in anticipated gross profit.

The owner’s immediate reaction might be that the ERP isn’t providing the necessary information. However, several possibilities deserve consideration.

Perhaps the system has cost-to-complete forecasting functionality that was never implemented. Maybe project managers aren’t consistently updating budgets and outstanding commitments. The organization may have outgrown its original job-costing structure, or the ERP may genuinely lack the functionality required to manage increasingly complex contracts.

Each situation requires a different solution, and replacing the software won’t necessarily resolve the problem. For business owners, the starting point is asking the right questions.

1. Can I See What My Projects Are Expected to Earn, Not Just What They’ve Cost?

For project-based businesses, understanding historical performance is only part of effective financial management.

An owner should be able to ask how profitable each active project is expected to be upon completion, how those expectations have changed since the original estimate, and which projects are showing signs of financial deterioration.

These questions are particularly important for construction companies, engineering firms, industrial contractors and custom manufacturers, where projects can extend over months or years and financial performance is influenced by changing costs, schedules and operational requirements.

If the finance team cannot provide reliable answers, the owner should want to understand why.

Is the necessary information available in the ERP but not being reported? Are project managers maintaining forecasts outside the system? Are commitments and cost-to-complete estimates being captured consistently?

Or does the software lack the necessary capabilities altogether?

An experienced CFO can help identify what information the business needs, determine whether the existing system can reasonably provide it, and establish the financial processes required to make that information reliable.

2. Why Are We Still Relying on So Many Spreadsheets?

Excel remains an important analytical tool, even for businesses with sophisticated ERP systems. The concern arises when employees need to maintain separate spreadsheets to perform activities the ERP was intended to support.

For example, purchasing may track outstanding commitments in one spreadsheet, project managers may maintain separate profitability forecasts, and accounting may use additional files to calculate work in progress (WIP) and prepare financial reports.

These processes often develop gradually as employees find practical ways to meet their responsibilities. While each workaround may make sense individually, together they can create considerable inefficiency and risk.

Owners should ask which spreadsheets are essential analytical tools and which exist because the ERP isn’t being used effectively.

They should also understand whether the information in those spreadsheets is regularly reconciled with the accounting records, who is responsible for maintaining it, and what happens when a key employee is unavailable.

The presence of spreadsheets doesn’t necessarily mean the ERP is inadequate. It may indicate an opportunity to improve system configuration, reporting, training or the processes connecting finance and operations.

3. Are We Using the System the Way It Was Intended?

One of the most overlooked considerations is whether employees are using the ERP consistently and correctly.

A business can invest hundreds of thousands of dollars in software and implementation, only to use a fraction of its available functionality.

This can happen for several reasons. The original implementation may have prioritized getting basic accounting and transaction processing operational. Employee turnover may have resulted in the loss of system knowledge. Training may have been limited, or the business may have developed processes that no longer align with how the software was designed to operate.

As a result, employees can become highly proficient at working around a system without necessarily understanding its full capabilities.

For example, an ERP may offer detailed job-costing functionality, but if labour hours are coded inconsistently, purchase orders aren’t properly assigned to projects, or project budgets aren’t regularly updated, the resulting reports won’t provide meaningful insight.

A business owner doesn’t need to understand every technical feature of the software. However, they should be confident that someone has evaluated whether the organization is taking advantage of the functionality it already owns.

This requires more than asking the software provider whether a particular feature exists. It means examining how information is entered, maintained, reviewed and ultimately used in financial decision-making.

4. Why Does Finance Have One Number and Operations Another?

In complex project-based organizations, the relationship between finance and operations is critical.

Project managers often have the best understanding of changing labour requirements, purchasing commitments, production delays and other developments affecting profitability. Finance must ensure this information is accurately reflected in financial reporting and forecasting.

When these functions aren’t effectively connected, the owner may receive conflicting information about the same project.

The project manager may believe a contract is performing well based on their working forecast, while accounting reports a significantly lower margin. Alternatively, the finance team may present favourable results without recognizing substantial costs that operations expects to incur.

The issue may have little to do with software capability. Instead, the organization may lack a consistent process for updating project forecasts, reviewing WIP, reconciling commitments and communicating changing project expectations.

An experienced CFO can work with both functions to establish common reporting standards, clarify responsibilities, and ensure the business measures performance consistently.

The objective is to create reliable financial information that reflects operational reality and can be used with confidence.

5. Has Our Business Become More Complex Than Our Financial Systems?

Even a well-implemented ERP can become less suitable as an organization evolves.

A business that previously managed straightforward manufacturing orders may now undertake complex design-build contracts. A construction company may have expanded into multiple divisions, introduced new contract structures or begun managing significantly larger projects.

These changes can introduce more sophisticated requirements for job costing, revenue recognition, WIP, purchasing, inventory management and cash flow forecasting.

Owners should periodically consider whether their financial systems have evolved alongside the business.

However, increasing complexity doesn’t automatically require a complete software replacement.

Many ERP platforms offer additional modules, integrations and reporting capabilities that weren’t necessary when the system was originally implemented.

The question is whether the existing environment can be reasonably adapted to support the business’s current and anticipated requirements, or whether its limitations have become significant enough to justify a change.

How Can You Tell Whether It’s the ERP or the Way Your Team Uses It?

Before making a major software investment, a business owner should have someone independently examine the system, the financial processes and how employees interact with both.

One practical approach is to select a few representative projects and trace how financial information moves through the organization, from the original estimate and purchasing commitments through labour allocation, project costing, billing and financial reporting.

For each breakdown identified, there are several questions worth investigating:

• Is the information being captured? If a project forecast is unreliable because remaining labour hours are never updated, replacing the ERP won’t solve the underlying process problem.
• Is the information being captured correctly? If purchases, inventory or labour are consistently assigned to incorrect projects or cost categories, the problem may involve training, accountability or financial controls.
• Can the system produce the required information? If reliable data exists but reports require extensive manual work, the opportunity may involve better configuration, reporting tools or additional functionality.
• Can the ERP reasonably support the business’s requirements? If important capabilities are unavailable, integrations are impractical or customizations have become excessively costly, the organization may have a legitimate case for replacement.

An experienced finance leader can help investigate these questions objectively, working with the employees who use the system and, when appropriate, the ERP provider.

A good assessment should identify opportunities to improve financial processes regardless of whether the existing software is retained.

It should also define what the business needs from its financial systems before considering any replacement. Otherwise, you risk investing in a new platform while carrying forward the same processes and reporting deficiencies that created the original frustration.

The Value of an Experienced CFO in Evaluating Your ERP

For business owners, assessing an ERP can be challenging because the conversation often becomes focused on technical functionality rather than the financial information needed to manage the business.

Software providers understand their platforms, while internal accounting teams understand their day-to-day responsibilities. However, neither perspective necessarily provides a complete assessment of how financial systems should support operational performance, profitability and long-term growth.

An experienced CFO can bring those perspectives together.

By reviewing financial reporting, interviewing employees, examining existing processes and understanding the organization’s operational requirements, a CFO can identify where the business is losing visibility, creating unnecessary administrative work or exposing itself to financial risk.

This may involve improving job-costing structures, establishing more reliable WIP and cost-to-complete forecasting, strengthening internal controls or redesigning management reporting.

It may also involve helping the organization evaluate potential ERP solutions, develop meaningful selection criteria and understand the financial implications of a transition.

Importantly, the objective isn’t to recommend the most sophisticated software available. It’s to ensure the organization has financial systems and processes appropriate for the complexity of its business.

Better Financial Information Starts with Asking Better Questions

An ERP should provide more than a record of financial transactions. For complex project-based businesses, it should support the information needed to manage project profitability, understand cash requirements, allocate resources and identify operational issues before they become significant financial problems.

When that information isn’t readily available, business owners are right to question whether their systems are meeting their needs.

However, making an expensive software change without first understanding the root cause can leave the organization with many of the same challenges it was trying to solve.

Before replacing an ERP, it is worth having an experienced finance leader assess what the business needs, what the existing system is capable of delivering, and whether the people and processes surrounding it are working effectively.

The most valuable outcome may not be a new ERP. It may be discovering how much more your business could be getting from the one it already has.