In a previous article, we discussed project-driven businesses and what makes them so unique. And we promised we will dwell on the characteristics of an ideal ERP system for a project-driven business in another article. So here we are – delivering on our promise! (In case you missed our previous article, you can read it here.)
Today, we are going to decode the components of a project-based ERP, and why one of these is worth investing in.
If you are a project-driven business, it’s crucial to choose the right ERP system to help support your enterprise. The right ERP - one that is specifically designed for projects - will ensure your business runs smoothly and efficiently – tracking all the data you need to grow your business. On the other hand, a more generic ill-fitting ERP system could be crippling to your profitability and productivity. And let’s be honest – no one wants that!
Firstly, Why Do You Really Need A Specific Project-Based ERP System?
When we talk about ERP systems and tools, project-based businesses have very distinct needs from other organizations. Each project is different, and a project based business should be able to manage each one effectively despite vast variations between the different projects they may handle. Now, that is not a task a generic ERP can handle!
Why, you ask? The simple answer is that a generic ERP is not designed to be able to manage and track information at the project level. And this is rather crucial when projects are the lifeblood of your business.
Let us simplify this further.
With their unique needs and requirements, a project-based company must be able to view its business in three dimensions. This means, their chosen ERP should clearly show them:
1. The nature of the expense,
2. What resource performed the work, and
3. The project this work was accomplished for.
If we are being honest, generic ERP software cannot fundamentally understand these project dimension and sees your business as flat or two-dimensional. They aren’t designed to grasp the vastness of project level information and its many distinctive layers.
If your project-based business is currently using a generic ERP, chances are that such a system requires various customizations to make it operate with a project point-of-view and is also drilling a hole into your pocket.
Some of the biggest downsides of a generic ERP system are:
· Poor visibility,
· Manual costing,
· Manual reconciliations,
· Assumed revenue calculations, and
· Manufacturing systems that aren’t tied to the projects for which the work is being done, to name just a few
You could be using predictive methods to approximate materials costs, or trying out reconciliation efforts to connect accounts receivable and accounts payable transactions. You might even have to spend weeks summing all this up into tangible information so company leaders can make informed business decisions.
In short, there is a lot of improvisation and a lot of room for error, both of which make the perfect recipe for disaster!
This is where a specific project-based ERP system steps in and makes a world of difference.
With a true project-based ERP system, you get a 3D view of your business. Every transaction is tied up with a business account, an organization, and the corresponding project – making it amazingly easy to track your progress without any guesswork.
Such an ERP gives you a clear overview of the three essential elements that are fundamental to your business’s success:
· Account – like the general ledger describing all expenses incurred for the project, such as - hotel costs, airfare, labour, and sub-contracts.
· Organisation – describing the department, functional group, or a product line, along with who is doing the work.
· Project – specifying the product or service being delivered to a customer or client.
Linking these elements allows your business to produce accurate and timely deliverables that are the backbone of your business, such as – financial reports, invoices, payroll, and status report for each project.
A true project-based ERP is a great investment for your business as it gives you unparalleled visibility and control of your business by enabling you to make decisions based on current, real-time information.
With a true project-based ERP system, you get a 3D view of your business, making it extremely easy to track your progress without any guesswork
Decoding The Various Components Of A Project-Based ERP
Now that you know why project-based ERP is the right choice for you, let’s take a deeper look at the anatomy of such a system, and what it has to offer you.
Below, we discuss the various parts and pieces of ERP tools that are built specifically to handle projects, and how they simplify business workflow by automating the right processes crucial for the success of every project.
1. They Allow You To Keep A Better Track Of Financials
In the project world, keeping a close track of money with the right financial tools is pivotal. You want your ERP to give you the ability to track your financials at the project level and keep close tabs on financial matters like
· general ledger,
· accounts payable,
· accounts receivable, and
In simpler words, to track the profitability of any specific project, you need to know -
1. Your revenue from that project - that is how much the client is paying you for the work
2. The project’s specific costs - including labour, materials, and other expenses
The difference between these numbers is the profit you make from the project. Sounds simple, right? But if your ERP is unable to track those costs and revenues at the minutest project level, calculating this difference isn’t really all that easy.
Without a project-based ERP, you could be stuck turning the standard Chart of Accounts into a complex project-tracking system. Not only does this lead to reporting and auditing nightmares for project-based businesses, it can also be disastrous where compliance is vital to success and your ERP is unable to factor that in. Not something you want; trust us!
2. They Ensure Timely Payments
Some might think that sending out bills and getting paid is easy-peasy. If only!!Every business functions this way; so what’s so hard? Let me elaborate.
For project-based businesses, billing can present very specific challenges. Why? Because each client is different, and each invoice might be presented differently too!
Clients often specify exactly how they want to be billed, along with added rules for billing each project. Those rules may vary greatly from project to project. The challenge here is to be able to bill each client in the exact way they want, without making manual inputs that lead to errors and wasting your time.
For example – some clients may want to be billed 25% of total project fee every quarter, while another may ask to be billed when key milestones have been achieved. Your billing tools need to allow for different billing rules to be established for each individual project.
Similarly, invoice formats change from organisation to organisation. Some companies expect detailed invoices showing every task completed and every employee who worked on the project, while another business may be ok with you sending a summary invoice without specific details to avoid confusion. Additionally, you could be working with an international client and might have to factor in different currency transactions.
Now, you want to work for these businesses, so you have got to follow the rules they lay down for their invoicing. If you don’t, the invoice will keep bouncing back and payments will be delayed – and no one wants that! Therefore, a project-based ERP that can handle all these customisations requested by each client is greatly beneficial.
3. They Keep A Close Track Of Time & People
The most important asset of any project-driven business is its people. The skilled labour hired for every project and their time. These skilled workers deliver your projects, and their cost to the company is a part of your total cost of the project.
A project-based ERP allows you to better calculate time and expense of each employee. To understand the profitability of the project you need to know the actual costs, including the all-important people costs.
For example, let’s say you have estimated that your employee Martha will spend 30 hours on a project. But when the project’s through, you need to know exactly how much time she actually spent on it. Maybe it was 40 hours in reality, and that makes a dent in your profit margin.
Likewise, you calculated Martha’s travel expenses for client visits at $2000, but how will you find the actual cost? Cancelled flights, fluctuation in cab fares, extra meals – all of these can affect your estimated travel expense and you need to know the ACTUAL numbers.
Needless to say, capturing actual time worked on a project can be THE KEY to understanding the project’s real costs. And that means, Martha should be able to easily log in your ERP and specify how much time she actually spent on a specific project/task, as well as document the expenses incurred during the project.
You’ll never know the true profitability without this information. This holds true regardless of whether Martha is completing a time and materials type of project where you bill the client for every hour she works as well as every expense she incurs, or the project is being done for a fixed fee, where you’re charging a flat rate for the project no matter how much time she works on it. Knowing how much time she actually spends on the project allows you to capture the ACTUAL time and expenses to ascertain true cost to the company, or you will never know if your project was billed at the right fee for your company to turn a decent profit.
Additionally, a project-based ERP also simplifies payroll. It automates the task of tracking employees, pay rates and benefits, and process payroll. For project-based businesses, this tracking has twofold benefit.
· One – paying salaries as well as issuing reimbursements becomes simpler
· Two – it helps understand what your costs are for the work each employee is doing. You can track what each employee costs to the company, and how much work he/she brings in to justify their salary or earn an appraisal/bonus.
Project-based ERP systems help identify costs because they can perform detailed analysis to distribute costs across the project and organization. They can help spread all costs such as building, utilities, and equipment across employees to give you extremely specific costs for your project resources. Such information helps you decide whether a project will be profitable for your business or not based on what every employee costs you and how large a team you will require to complete the project.
4. It Simplifies Getting In Compliance
For project-driven businesses, it’s crucial to comply with rules of accounting standards. This is especially true if you are a government contractor, though all kinds of companies today like to follow standard compliances applicable to their region.
Compliances like GAAP or Generally Accepted Accounting Principles - a common set of accounting principles, standards, and procedures that companies follow when they compile their financial statements, can easily be built into a project-based ERP.
GAAP is the commonly accepted way to record and report accounting information. It ensures the highest level of consistency in financial reporting and helps investors gain confidence in the financial statements they use during analysing companies or making investments.
Another one - IFRS - stands for the International Financial Reporting Standards and is fast replacing many accounting standards across the globe. These standards are designed as a common global language for business affairs, ensuring that company financials are understandable and comparable across international boundaries.
5. It Helps Keep Proper Track Of Inventory
Good project-based ERP systems simplify the task of keeping track of inventory – goods or materials.
· Keeping track of Inventory
Inventory defines materials that a company already has on hand and how you utilize these materials in different projects. This could be a piece of equipment or certain kinds of raw materials specifically for one project. A project-based ERP allows you to track these items carefully and add their cost to the overall costs of the project so that you are sure to make a profit.
· Putting it on your Tab
Sometimes, a project may require you to purchase specific materials or services from other businesses. The right project-based ERP ensures you can tie these items directly to each specific project. These will decide how you should bill the project in order to maintain your profit margins. Such a system ensures that your purchasing system is part of or directly tied to your project system to reduce the need to enter purchase orders in separate systems and reconcile them back to the project system.
· Manufacturing on a Project Basis
If your company manufactures items, you need specialised software for tracking shop floor activities, statuses, and completions. The right project-based ERP system can do all this and more, like capture work order status, support quality control and non-conformance findings, track shop floor activities, assist procurement systems to manage purchasing and tracking of materials. It can also generate sales orders for products and services while managing the shipment and invoicing process as well as manage asset inventories too.
Summing It Up
So, you see - a true project-based ERP ensures every transaction is connected to an account, an organization, and a project --- simplifying work and automating processes that could affect project timelines to derail the growth of your business.
Here is a simple diagram that allows you to see how a project-based ERP ties together all components of a project, guaranteeing its success.
Some examples of project-based ERP systems are Oracle Fusion Cloud Enterprise Resource Planning, Oracle Primavera P6 EPPM and Oracle EBS Suite Applications. If you want to know more about any of these, and how they can be used for your business, you know where to find us!
Liked what you read? Share it!
Follow us on Twitter and LinkedIn to stay abreast about more interesting industry blogs, news and upcoming events or visit our website.
About Projects Expert
Projects Expert is the first of its kind Oracle partner that specialises in Project Centric Enterprise Solutions. We aim to deliver sustainable, robust, and business-friendly Oracle solutions for Projects driven organisations.