Enterprise Resource Planning (ERP)

What is Enterprise Resource Planning (ERP)?

Enterprise resource planning – more commonly referred to as ERP – is a software system used to manage and maintain the functions of a business. The tasks are typically done in real-time.

Components of ERP Software

ERP programs are commonly known as business management software. They involve a host of applications that work together to:

• Gather data
• Store it for future reference
• Manage and sort the information for easier access
• Interpret the data for use by the business

Primary Functions of ERP

ERP provides a host of services for companies trying to improve how efficiently they operate. The systems are constantly being updated by the proprietors to offer the speediest and most reliable services.

As the name suggests, ERP’s primary goal is to manage the various resources within the company to make sure they are being utilized in a cost-effective way. It is also designed to make sure that all resources are being used efficiently.

ERP works particularly well for tracking and managing things such as a company’s capacity for production, cash levels, raw materials at its disposal, payroll information, and purchase orders.

Flow of Information

ERP software covers a lot of different areas within a company – accounting, sales, purchasing, manufacturing. One of the most important needs it addresses is the need to communicate all pertinent information to the many departments that may require the data.

The software, being continuously updated and watched in real-time, ensures needed information is accessible by each appropriate department. It is also designed to pass information between departments. For example, manufacturing may need to know about purchase orders on deck. Or, accounting may need to know the status of payroll and business commitments that are lined up to keep the company’s cash flow up to date.

ERP software can also pass the information along to outside stakeholders. Their investment in the company is dependent, typically, on how efficiently a company is running and how financially strong it is. The data within an ERP system reveals the relevant information to all stakeholders to keep them abreast of the company’s capacity to function and generate revenue.

Enterprise Resource Planning in the IT Industry

ERP systems and software are an industry unto themselves, located at the heart of the technology space. Because of ERP systems efficiency, success – and therefore, desirability – it is an industry worth several billions of dollars today.

Investments in information technology boast the distinction of being the category responsible for the largest expenditures within the U.S. Within the past decade specifically, ERP systems skyrocketed in terms of use and, therefore, began to dominate the IT sector. Though the earliest ERP systems were designed specifically for use by large enterprises, they can now be found in a growing number of smaller companies because of their usefulness.

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Accounting Information System (AIS)
• Inventory Turnover
• Logistics
• Operations Management
• Supply Chain
• See all accounting resources