What is an ERP and how does it work?

An ERP, or rather, Enterprise Resource Planning, is a software designed to provide a 360° view of all your core business processes. Of course that’s a very simplified definition, so let’s find out exactly what an ERP does and how it can be advantageous for your business.

What is an enterprise resource planning (ERP) system’s basic components?

Enterprise Resource Planning (ERP) systems have evolved significantly since their early roots in 1913. What began as a simple paper-based inventory control process has transformed into robust, cloud-based software used by companies of all sizes.

At its core, an ERP system connects key business functions such as finance, operations, inventory, and human resources into one unified platform. This integration allows teams to access shared data, streamline daily operations, and make informed decisions faster.

Choosing the right ERP solution depends on your business size, budget, and specific needs. Vendors offer flexible systems that can be tailored through modules based on industry challenges and organizational goals.

Cloud-based ERP models have grown in popularity as businesses shift away from brick-and-mortar operations. These platforms provide 24/7 access to real-time data from any internet-connected device, which increases mobility and collaboration.

One of the system’s most powerful benefits is centralizing company-wide data into a single source of truth. This not only improves reporting and analytics but also automates tasks that once required hours of manual input.

An ERP system’s basic components are its functional modules. These include applications for accounting, order management, inventory tracking, customer relationship management (CRM), human resources, and project management.

Each business chooses modules that suit its structure. For example, a retailer might focus on inventory and order fulfillment, while a consulting firm might need time tracking and PSA tools.

What is an ERP system used for?

An ERP system is used to streamline a company’s everyday operations while providing deeper insight into business performance. It acts as a central hub that connects departments and automates processes to reduce errors and improve efficiency.

To understand its impact, consider two fictional examples:

Corporation A is a food and beverage distributor operating across North America. After implementing an ERP system, they can now track product demand by region, manage inventory levels in real time, and monitor invoices for every retailer.

Corporation B, a consulting firm focused on Engineering-To-Order (ETO), still relies on manual processes. Without ERP, employees enter project data, expenses, and PSA details by hand, using a local server with limited access.

This setup often leads to reporting delays, lost invoices, and input errors—issues that could easily be avoided with ERP software.

ERP systems are especially valuable for businesses juggling multiple tools or departments. By centralizing data, the system automatically connects workflows, simplifies reporting, and delivers up-to-date information that helps leaders make smarter decisions.

Having a single source of truth improves accuracy and reduces duplicate work. With ERP, you gain real-time visibility into your operations, which is essential for staying competitive and growing sustainably.

What is an ERP system in accounting?

It’s long been assumed that an ERP is specifically designed for finance; however, finance is actually just one module of an ERP.

In terms of accounting, ERP Financials is the ideal solution. It centralizes all branches of accounting: financial accounting, subledger accounting, accounting hub, payables and receivables, revenue management, billing, grants, expense management - the list goes on.

Many ERPs also offer users with specific finance customizations. For example, if a business has multiple locations in different countries, it will prepare reports that take into consideration accounting standards and tax deductions based on each region.

What is an ERP strategy?

An ERP strategy is a structured plan that guides how your organization selects, implements, and manages an enterprise resource planning system. Without a clear roadmap, even the best ERP software can lead to wasted time, money, and missed expectations.

Unlike spontaneous decisions in daily life, business success depends on preparation. ERP systems require more than just a financial commitment—they demand team alignment, executive buy-in, and a well-matched vendor to support your business goals.

Your ERP strategy should reflect your company’s specific objectives, timeline, and future growth. It helps define each step in your ERP journey, from system selection to post-launch optimization.

Here are key steps to include in your ERP strategy:

Identify IT Challenges

Meet with your technical team to assess whether your infrastructure can support a new ERP system or if upgrades are needed.

Manage Budget Expectations

ERP implementations can be costly, so plan for upfront expenses and prepare for potential budget overruns during the project lifecycle.

Outline Potential Risks

Anticipate challenges that may arise—such as data migration issues or downtime—and create a risk mitigation plan ahead of time.

Prepare Your Team

Assign clear roles, responsibilities, and goals. Team readiness is essential to staying on track and ensuring your implementation has enough support.

A well-planned ERP strategy increases your chances of long-term success and helps ensure that the investment pays off across every area of your business.

What is an ERP vendor?

ERP software is built, sold, and supported by vendors, categorized into three tiers based on their size, target clientele, feature depth, and implementation scope.

Tier 1 vendors, like SAP, Oracle, and Microsoft, provide enterprise-level solutions designed for large multinational corporations. These systems offer comprehensive global operations support and extensive customization, although they demand significant time and financial investment.

Mid-market companies are best served by Tier 2 ERP vendors such as NetSuite, Acumatica, Epicor, and Sage Intacct. These vendors offer strong, industry-specific features with quicker deployment times, reduced costs, and scalability to accommodate company growth. Notably, NetSuite is a leading hybrid cloud ERP within this tier.

Tier 3 ERP vendors, including QuickBooks and smaller niche providers, cater to small businesses with fundamental operational requirements. They deliver streamlined, affordable functionality but lack sophisticated features and multi-site support.

ERP Systems Pros and Cons

Investing in an ERP system can transform how your business operates—but like any major decision, there are both advantages and disadvantages to consider.

Pros of ERP Systems

Modern ERP systems help growing businesses save time, reduce errors, and improve decision-making. With centralized access to inventory, orders, customer data, and financials, you can forecast demand and manage resources with greater accuracy.

Instead of juggling disconnected systems, an ERP connects departments so teams can collaborate using real-time data. Better communication leads to faster decision-making and clearer business insights.

ERP platforms also offer advanced reporting tools. With built-in dashboards and data visualizations, you can track performance trends and uncover areas to optimize—turning your data into a strategic advantage.

For many companies, switching to an ERP uncovers issues they didn't even know existed. Whether it's bottlenecks, inventory inaccuracies, or outdated processes, ERP software helps you identify problems and make smarter adjustments.

Although subscription costs can add up, especially with customizations, the long-term value in improved efficiency and cost savings often outweighs the initial investment.

Cons of ERP Systems

Despite their benefits, ERP systems come with challenges. The most common concern is cost—both upfront and ongoing. Licenses, implementation, and training require budget planning and executive commitment.

Legacy systems often create compatibility issues. If your existing infrastructure can’t handle the new software, your IT team may need to reconcile old data, which can cause delays and extra costs.

ERP implementation isn't plug-and-play. Custom modules, role-specific dashboards, and internal process changes can feel overwhelming without the right training. Keeping your team involved early makes the transition smoother.

Another concern is maintenance—but most cloud-based ERPs include system updates and support as part of their subscription. Still, it's important to check your vendor agreement to confirm what’s covered.

Choosing the right ERP vendor and strategy can make or break your experience. Evaluate your business size, complexity, and goals to decide which tier of ERP vendor is the right fit.