People, Process and Technology are the three levers that you have as a startup CEO to drive efficiency. For our purposes, Technology is defined as the systems and tools you use to run your business and execute on your operations. A customer order and relationship system should rightfully be the tip of the spear for your tech stack, so you might not think of your ERP as an opportunity for efficiency gains that impact your entire enterprise. However, if you’re on a Quickbooks or Xero instance and feel like you might be finding the edges of their capabilities, it might be time to evaluate changing and capturing some efficiency gains. Some phrases you’ll regularly hear that are indicators that a change is a nigh include:
- “Sorry, it’s taking so long to get those reports,”
- “We simply can present the data in that way” or
- “We’d be happy to do that but are still really busy trying to get through the monthly close”
With a collective decade of experience working with hundreds of startups, we’ve seen this story play out countless times. To help you navigate the decision and understand what’s involved and what’s at stake, we’re sharing some stories and examples from the trenches. In fact, one of our startup clients that sells software and services to a global audience is in the middle of converting from a hosted Quickbooks Enterprise to Netsuite. They will close the year with $18m in ARR, have just over 100 employees and have offices in the US, UK, and Israel. They are our poster child for upgrading to an ERP system!
(A quick note before we continue: Companies converting to Netsuite may also consider Intacct, which was recently acquired by Sage. Intacct has an arguably more modern UI, but it was the strength of multi-language and the pre-configured Suite Success (more on that shortly) that has given our bias to Netsuite in our above example.)
What is ERP?
Enterprise Resource Planning or “ERP” software, is a centralized database that organizes and helps automate, a company’s business and back-office functions. Fast-growing startups use ERP to make it easier for executives and accounting teams to understand their company’s accounting, services and HR (and manufacturing, if needed). Typical ERP systems functionality can include, depending on the modules your startup chooses to install:
- Inventory Management
- Payroll (some ERPs have this option)
- Reporting and Analytics, and Business Intelligence
- Logistics and Supply Chain Management
5 Signs Your Startup is Ready for ERP
You should consider implementing an ERP solution if your startup meets any one of the following criteria:
- You expect to have 100+ employees within the next 6 months
- You expect to have $10M+ in Annual Recurring Revenue within the next 6 months
- You have 6+ domestic subsidiaries
- You have 2+ international parent/subsidiary companies
- You operate in high volume, high complexity industries such as FinTech, B2C SaaS, or eCommerce AND you meet 50% of one or more of the criteria above. (For example, you should consider moving your startup to an ERP software if you operate in the Fintech industry and will have 50+ employees within the next 6 months)
ERP upgrades are a common sales tactic of many “body-shop” accounting firms. We’ve seen several instances of accounting firms’ salespeople trying to use ERP as a scare tactic to convince startups to undertake expensive, unnecessary ERP implementations. If you are not experiencing any of the above criteria, you probably don’t need to undergo the headache and expense of an ERP “upgrade.” Because of the complexity of setting up and managing an ERP software, most Series A and B startups will not experience a high ROI unless they have any of the five items listed above!
Real World Examples of Successful Startup ERP Implementations
When your startup should have an ERP system but doesn’t, life is painful for your Finance team, and your risks are increased. I once led Finance for a startup that wasn’t ready to make the investment. Yet, eventually, they had three entities across three geographies, each with their own currency, and they all needed to be consolidated. The monthly close process became time-consuming and cumbersome. The Excel-based consolidation had the potential for formula errors and miscoding, every month. As a result of this manual, force-driven approach, there was only one way we could view the financial statements; forget any dynamic reporting dimensions. The team tasked with publishing the financials had little time for getting ahead and in front of the other requests that were made of them on a daily basis. We survived but did not thrive, and spent too much time on reporting and not enough time driving strategic insights to help the business improve.
In contrast, I’m really excited about what life will be like at the startup where one of our CFO’s is implementing Netsuite. We’ll be able to look at the P&L by product, geography or other dimensions of our choosing. Our local accountant in Israel will be able to have the system in his local language and have customized reporting for compliance with local regulations. The company’s Salesforce activity will automatically populate the ERP system, through an intermediary software called Celigo. Our other tools such as Bill.com, Expensify, and TriNet will all be connected and integrated as well. And consolidation….WHOA CONSOLIDATION!! All the subsidiaries are on the same ERP instance with their foreign currencies automatically converted to our functional currency, the U.S. Dollar, and will have automated elimination entries. We can quickly and easily switch from views from an individual subsidiary to a consolidated, parent view, in two clicks or fewer. We’ll be recognizing revenue in compliance with ASC 606 by parsing out the different elements of our sales arrangements and recognizing them over the appropriate time periods. Oh, the joy! Let storm clouds part from a ray of sunshine while harps are strummed and angels sing!
ERP Implementation Timeline at a Startup
Under an expedited implementation program that Netsuite offers called “Suite Success,” many industry-specific setups come pre-configured. Even with this expedited configuration, a three months implementation is standard at most startups.
This, of course, is in addition to the breakneck pace of your Finance team’s day job. In my example client’s situation, this includes 2019 financial modeling, ASC 606 readiness, a bank audit, and of course the monthly close, commission and expense reimbursement payments, and all the other things. In other words, the conversion exercise is not for the faint of heart or those unwilling or unable to dig in and put in weekend and evening hours. Then again, I suppose, neither is life at a startup.
So, to be on the safe side, assume 3 to 6 months of implementation for your startup’s ERP software!
ERP Software Cost for Startups
In addition to the time commitment, there’s a significant difference in cost between ERP software and an earlier stage solution. If your startup is using Quickbooks Online you might be paying something in the neighborhood of $50/month. If you’re using a hosted solution for QuickBooks Enterprise Desktop, you might be paying between a range of $150 - $400/month. When you make the leap to ERP, you should anticipate a 10x increase in your monthly cost starting at no lower than $5k/month, plus system integrations and on-boarding expenses, which will be several thousand more. To determine if this cost is justified, consider the following:
- How much time does it take your team to produce your monthly financial statements or other reports, and what efficiencies could be enjoyed from a more robust system?
- Are your various systems (Salesforce, Expensify, Carta) integrated or is data manually fed or typed from one system into another?
- What is the likelihood that there is an error in financial reporting as a result of manual processes?
- How much would that financial error cost you in enterprise value in a liquidity event?
- How much better could your decision making be if you had better, more accessible data?
Admittedly, we’ve only skimmed the surface about the benefits and commitments that are part of upgrading to a real ERP software. Our hope is that by sharing this exploration with us you now have a starting point for a conversation when you’re ready.
The best leaders seek financial information about their startup to drive strategic decision making and resource allocation. Others are simply concerned about the cash-end date and ensuring monthly financials get completed for board or bank requirements. If you are in the former category and aren’t getting the insights you’d like, in a timely manner, it might be time to pull that Technology lever and transition your organization to an ERP solution.