Looking Beyond QuickBooks

Looking Beyond QuickBooks

What’s Next? The Short Answer: ERP.

Even the smallest of businesses must balance its books and meet government compliance and regulatory financial reporting requirements. Early on, many small businesses turn to QuickBooks as an easy-to-use, affordable accounting solution. But there is more to your business than just debits and credits, paying bills and collecting cash. At the very minimum, you need to manage those operations that directly or indirectly generate your cash flow. In the beginning you might be able to control these operations with a series of spreadsheets, but sooner or later you will need more.

If your business is successful, eventually you will need to look beyond spreadsheets and QuickBooks. You will need a broader solution, something that helps rather than hinders your business. You might first try tacking on point solutions to address individual needs as they arise, but if these don’t talk to each other, before you know it, your “back office solution” is held together with the software equivalent of baling wire and duct tape.

So, what’s the alternative? The short answer is ERP. ERP is short for Enterprise Resource Planning, a convenient label for the software that runs your business. Yet many companies delay this next step, fearing implementation will take too long and be too costly. They also fear change and disruption.

While the perception that implementing ERP must be an expensive, scary ordeal lives on, research shows this is a myth that lingers from early days when ERP was rigid, limited in functionality, hard to implement and even harder to use. Today’s flexible, technology-enabled ERP solutions are nothing like those of the past. They provide many more features and functions, and are easier to implement and easier to use. And while ERP requires careful evaluation, selection, planning and commitment, it can indeed provide very significant returns on your investment.

Still not convinced? Read on to better understand how to recognize when the time is right for taking that next step, and what you can expect if indeed you do.

BUT FIRST… DEFINE ERP

Mint Jutras defines ERP as an integrated suite of modules that provides the operational and transactional system of record for your business. However most ERP solutions today do much more. And yet most small companies settle for something less, leaving them with little control and even less visibility into how best to grow most profitably. 

Integrated is a key word in our definition and perhaps the biggest reason why, if you are small company, you can’t afford not to invest in ERP. You need most, if not all the key components required by large enterprises, and yet you don’t have the deep pockets to stitch different pieces of the puzzle together to make it a cohesive solution. And the alternative – manually transferring data between applications – is inefficient and error-prone.

Furthermore, while our definition represents the minimum requirements, most ERP solutions today can do much more. And yet many small companies settle for something less, leaving them with little control and even less visibility into the data needed for effective management and data-driven decision-making.

If you are running QuickBooks today, you essentially have a bookkeeping system. Yes, there are different versions of the solution, so you may have progressed beyond basic bookkeeping tools, adding on automated billing and/or tools to manage projects, inventory and contractors. But this still leaves a lot of the operations of your business underserved.

Today there are very affordable ERP offerings that not only support your accounting functions, but your operations as well, through a complete and integrated solution. And a lot of the old barriers preventing you from implementing a full solution, like lack of capital or lack of technical expertise, have been eliminated with the cloud, particularly those that are offered as software as a service (SaaS). A SaaS solution enables you to manage both your accounting and your operations without building out a data center, hiring a huge information technology (IT) staff or consuming a lot of capital.

Why… and When Do You Need ERP?

QuickBooks was designed with a small business in mind. While over time Intuit, its creator, has expanded its features and functions, and offers different versions of the product, even when you bought it, you probably knew (hoped) that you would eventually outgrow it. As you grow, you start to find areas that QuickBooks doesn’t handle, and perhaps your first response is to start filling gaps. But in doing so, you are also creating extra work and inefficiencies.

For example: Your sales team needs to manage contacts, opportunities and pipeline. So, you invest in a sales force automation tool, usually under the guise of customer relationship management (CRM). Now you have a customer master file in CRM, in addition to the one you use in QuickBooks. Are they the same? Synchronized? And, even though you might be able to create a quote in CRM or an estimate in QuickBooks, you still don’t have an order as part of your digital system of record. Do you still manage those in spreadsheets?

This is just one example of how data and processes can become clumsy and disjointed. How do you really manage your inventory, your warehouses, your workforce, your production? These are often the gaps QuickBooks leaves. If you start to solve these problems departmentally, applications can proliferate and pretty soon each department has its own version of the truth, and you start to lose sight of the forest for the trees.

Sometimes it is necessary to pull back and take a good hard look at the forest. Here are some “tell-tale” signs you need much more than a bookkeeping system, even if it is surrounded by other applications. These signs are all pointing you in the direction of a fully integrated ERP solution.

Redundant Data

You have multiple “master” files. Customers are stored in QuickBooks for invoicing, accounts receivable and cash collection. But they might also exist in CRM and in whatever application (or spreadsheet) that captures actual orders. You might have an item master defined in QuickBooks in order to value inventory assets, but is that the same item master that defines your product catalogue and drives warehouse operations and shipments? You might pay your employees through QuickBooks but where and how are skills inventoried and performance reviews managed? Is data scattered in file cabinets, offline spreadsheets and across applications? Can you guarantee all this redundant data is synchronized? Are you manually transferring it from QuickBooks to other applications? If you are, then you are almost certainly introducing errors and inconsistencies.

You’re Wasting Time

With scattered data, are you wasting time pulling together inconsistent and incomplete information? Do the various departments in your organization collaborate effectively to make data driven decisions or do they spend more time exchanging reports or waiting for data? And what happens when you can’t easily find the data? In addition to wasting time looking for it, are you wasting time working on the wrong tasks? Are you still performing manual tasks that could be easily automated? Even worse, are uninformed decisions misdirecting your efforts?

You Don’t Trust The Data You Do Have

When financial and operational data is not synchronized in real time you can get conflicting information. All it takes is one occurrence of this and people start to mistrust the data, causing them to second guess it, along with the decisions others are making. They wind up either wasting more time trying to reconcile it, or they ignore it completely, replacing it with their own data and observations, from what could be a very limited view. And yes, that means a proliferation of spreadsheets, which is another tell-tale sign that you need a complete and integrated solution. You need ERP.

You Can’t Meet Customer Demand

Your inventory levels are rising, yet you still can’t seem to meet customer requested ship dates. All the financial reporting and planning in the world won’t tell you how to meet demand. How do you better forecast demand, lean out your inventory, and produce product just-in-time when your financials and operational data are not integrated?

You Are Expanding Globally

It used to be that only large companies could establish a global presence. But the Internet has forever changed the world and leveled the playing field.

Today it is possible for even small companies to create a global brand, and this may mean you need to start operating as a multi-entity corporation. The 2019 Mint Jutras Enterprise Solution Study found even small companies (those with annual revenues below $25 million) operated from an average of 4.91 locations and 39% of them operate as a multi-national enterprise with multiple legal entities. This brings a new level of complexity to your business that can’t be managed from a desktop, or multiple desktops. Yes, there are online versions, but do they really go far enough?

Listen To The Signals, Reap The Rewards

These are just a few of the signals your business might be sending you, trying to tell you it is time to look beyond QuickBooks.

Switching from QuickBooks to an integrated suite of modules that forms the complete operational and transactional system of record – or in simpler terms, implementing ERP – can bring many benefits, not the least of which are:

  • Eliminating manual data transfers across applications to speed processes and get everyone on the same page, in order to…
  • Make informed, data-driven decisions from integrated financial and operational data
  • Improve productivity and operational efficiency with a single integrated solution; putting that solution in the cloud brings added benefits
  • Support growth and expansion, even when that includes multiple subsidiaries in multiple countries

In spite of all these potential benefits, many ignore the warning signs and delay looking beyond QuickBooks, fearing ERP. They assume implementation will take too long and be too costly. They also fear change and disruption. And while the perception that implementing ERP must be an expensive, scary ordeal lives on, it is indeed a myth. Today’s flexible, technology-enabled ERP solutions are nothing like those of the past. While ERP requires careful evaluation, selection, planning and commitment, it can indeed provide very significant returns on your investment, very often in a shorter period of time than you might imagine.

   “Top 3” Goals of ERP

In our 2019 Enterprise Solution study, we asked participants to select their top 3 goals for implementing ERP. The most often selected were:

  • 38% Support Growth
  • 30% Improve customer responsiveness and fulfillment
  • 30% Improve selected performance metrics
  • 26% Gain more control and visibility
  • 26% Gain a competitive advantage
  • 26% Reduce frustration and improve efficiencies in transacting business

Debunking The Myths 

In the past, ERP implementation admittedly was not for the faint of heart. Today however, it is neither the scary ordeal that it once was, nor is it doomed to fail. While past disasters provide good fodder for sensationalized headlines, failure rates are generally overstated. A recent Mint Jutras study of ERP implementation success found 67% rate their implementations as successful or very successful. Those who reported only partial success still realized benefits, although the results “could have been better.” However, those were most likely to be aging solutions with functionality limited by older technology. Even so, a scant 2% said they were “not very successful” and only one out of the 315 surveyed described their implementation as a failure.

Have A Plan – Set Goals – Experts Are Here To Help

That doesn’t mean it is a trivial task. Yes, ERP implementation is challenging and demanding, and potentially disruptive to your business during the project. You really must expect this. After all, it will be the software you will use to run your business – your whole business, not just the accounting functions. Unlike your implementation of QuickBooks, which primarily impacted your finance and accounting folks, ERP should involve all the different departments and functions in the organization. But the benefits are definitely worth it. So secure top management commitment and create a plan.

An ERP implementation is too important to embark upon without first setting goals. Goals are useful in setting expectations and driving return on investment (ROI). Our research shows goals are most likely centered around growth, improving performance and creating more efficiency.

Implementing ERP requires a different skill set than running your business. Don’t be afraid to seek guidance and assistance from those that do this for a living. ERP experts can help you identify goals, set a realistic schedule and budget and keep you on track. These experts will not be distracted by the day- to-day firefighting intrinsic to any business.

Setting A Good Pace

Your schedule should be aggressive enough to establish and maintain momentum throughout, but it must also be achievable. Putting together a schedule that is impossible to meet, regardless of how hard you work, adds additional stress on top of the stress introduced by any kind of change.

Typically the best people to involve in the project are those you can least afford to distract from their current responsibilities. But assign them anyway. Many, if not all members of the implementation team will still be required to do their “day jobs” during the implementation. These are the folks that will get it done.

So, what is aggressive enough, but still reasonable? The specific answer to that question will vary based on many factors, including the solution itself, the prior experience of the team, size of company, complexity of the business, and other factors. It is very important to work with your solution provider in this respect. Some, but not all, will have developed tools, templates and methodologies to speed implementation and improve your experience.

For decades, the “normal” implementation was thought to take nine to twelve months. But new, next generation software has been designed to be easier to implement and far easier to use and timeframes are shrinking. Our 2018 study showed the average time to a first “go live” was just over nine months (9.28) but our latest results from 2019 shaved about six weeks off that time for an average of 7.85 months. But even this reduction in time doesn’t tell the whole story.

First of all, we also saw a high rate of variability, and this variability was most dramatic in terms of expectations. Those with more aggressive plans achieved this milestone far ahead of those who allowed work to expand to fill the time allowed.

The important lesson here: While those who were most aggressive were a bit overly optimistic, they still managed to go live much faster than those who allocated more time. Don’t over-pad your schedule. Perhaps you can be overly aggressive, but it is better to err on the side of too fast than too slow.

Secondly, this year we found a few very long implementations skewed the overall average. Note that almost one in four (23%) achieved their first “go live” in less than three months and almost half (46%) did so within six months.

Expect & Achieve Results

A recent Mint Jutras report, The Real Facts About ERP Implementation, went into great detail in order to debunk the myth that ERP failure was more common than success. While limited to studying implementations in manufacturing and wholesale distribution, we find the overall results applicable to virtually any business today. Two thirds (67%) of those surveyed rated their ERP implementations as successful or very successful, and we found only one out of the 315 participants described it as a failure.

But the key question any small business has in moving from QuickBooks to ERP is, “How long will it take for it to pay dividends in terms of ROI?” In our surveys we specify ROI to be the length of time it takes to recoup 100% of the initial cost of ERP through cost savings or added revenue. We also ask for both the projected and actual time. While we have been observing both expectations and realized timelines shrinking for several years, we noticed a dramatic drop off between our 2018 ERP Implementation Study and our 2019 Enterprise Solution Study. For the first time ever we’re seeing both projected and actual time to be (significantly) less than two years.

We also find that company size is a contributing factor. While the overall average of the actual timeline for achieving ROI in 2019 was 1.63 years (about 19 months), if we look at the average for small companies only, the timespan is reduced to 1.33 years (about 16 months). But it increases steadily as the company grows. The sooner you recognize the need to look beyond QuickBooks, the faster you will realize the benefits. This actually makes a lot of sense, considering the complexity of the business typically grows along with revenues.

ROI is most likely to be directly attributed to cost savings, but can also come from increased revenue, especially when that increase comes without an offsetting and comparable cost increase. In moving from QuickBooks, the most obvious cost savings come from the operational side of the business. For product-centric businesses, that most often means a reduction in inventory, a result of having greater visibility and accuracy and better planning. But it can also come from better supplier management and even an increase in production capacity without adding headcount or capital investment (think machines and equipment), also through better planning and greater visibility than even the best financial reporting can ever provide.

But in moving from a combination of QuickBooks and other tools like spreadsheets and individual point solutions to fill operational gaps, non-cost related improvements are perhaps even more important. Figure 4 provides you with a list of possible improvements and the likelihood of you experiencing them.

Summary & Recommendations

QuickBooks provides a great start for many small companies. It is an easy-to- use, affordable accounting solution. But there is more to your business than just debits and credits, paying bills and collecting cash. At the very minimum, you need to manage those operations that directly or indirectly generate your cash flow. In the beginning you might be able to control these operations with a series of spreadsheets, but sooner or later you will need more.

If you have started to fill those gaps with add-on point solutions, you have likely created an environment that is increasingly difficult to manage. If you have multiple copies of the same data (e.g. customers, products, employees, suppliers, etc.), are they fully synchronized? Are you manually transferring data between those applications or entering the same master file or transactional data in two or more systems? If so, you are almost certainly introducing errors. As soon as you find one of these errors, you begin to mistrust the data and potentially even start working around it, and also working around (not with) the applications that are intended to make you more efficient and more productive.

How do you get this less-than-ideal situation under control? The answer is in replacing your bookkeeping system, and those other individual, disconnected applications with an integrated suite of modules that forms the operational and transactional system of record. That’s the definition of ERP.

Yes, early ERP solutions were rigid and inflexible, limited in functionality, hard to implement and even harder to use. Today’s new ERP solutions are an entirely different animal. Solutions today can be more flexible and technology- enabled. They can provide many more features and functions to support, not just your finance department, but all your operational needs. They can be easier to install and with SaaS solutions, you even skip this step entirely. The best solutions are easier to implement and most importantly, easier to use.

As a growing company, you will outgrow QuickBooks. Plan your next step carefully. Evaluate solutions carefully. While technology has truly changed the ERP game, some vendors will have embraced this new technology more aggressively than others. It definitely pays to choose wisely.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Related Post

Driving Inventory ROI: How CFOs Can Maximize Cash Flow and Minimize Loss

Driving Inventory ROI: How CFOs Can Maximize Cash Flow and Minimize Loss

With Better Visibility Into the Connection Between Inventory and Financials, CFOs Can Increase Profitability.

Any finance professional working at a products-based company knows that inventory represents one of its biggest assets—and investments. The problem is that CFOs and controllers often lack a way to easily view and monitor the relationship between inventory and financial data. This prevents them from aligning cash flow with inventory needs to ensure the company has money when it needs it to make smart inventory investments.

And that’s especially troublesome as prices rise due to inflation and global supply chain disruptions have made it more difficult to acquire products, making cash flow tighter in a growing number of markets. Purchasing decisions must be intentional and backed by data to ensure the money you do have is put toward materials, supplies and finished goods that will generate strong returns. While inventory is considered an asset, CFOs know all too well that it also represents cash. Each shelf of inventory is essentially a small pile of money, and the longer it sits there, the more those stacks of cash shrink.

The right plan and the right technology can go a long way toward improving inventory decisions in a way that boosts cash flow. Finance chiefs need systems that provide a real-time picture of inventory and financials to create comprehensive, detailed forecasts and corresponding plans. Only then can a business maximize its chances of buying more of the products that will sell quickly and fewer of the slow movers, in turn increasing available cash.

We’ll explain the step-by-step approach that can help you optimize inventory purchases and the tools you need to do so efficiently and effectively. An integrated plan can help bring your business closer to the ideal inventory levels that lift revenue and profit.

How Inventory Affects Your Cash Position

Too often, purchasing decisions aren’t made with the organization’s financial position in mind. CFOs and other financial leaders often have a rough idea of their company’s inventory position. They may know the approximate dollar value of all the products they’re holding and be able to name the bestsellers, but they’re not closely tracking the movement of goods. Perhaps they have access to additional inventory information in spreadsheets or a basic inventory management system, but it’s not up to date.

Without detailed information about the location of products, their turnover rate and exact status—on order, in transit, allocated to an existing order—it’s all but impossible to know how long on-hand stock should last and when it will be time to reorder. Without reorder dates in mind, it’s extremely difficult to predict future cash needs. When will the procurement team need this money, and how much will it need? When might the company have more free cash flow than usual that the CFO can invest elsewhere?

At the heart of the problem are issues that plague many growing businesses using manual methods or an entry-level inventory management system:

  • Items cannot be tracked across multiple locations, like stores, warehouses and 3PL facilities.
  • Inventory levels don’t update in real time and are instead refreshed every few hours, at the end of each day or, worse yet, manually.
  • Data on available stock, purchase orders and sales orders is spread across a confusing web of spreadsheets and applications that make it challenging to get a complete picture of inventory.

This means there’s no one place CFOs can check for a quick overview of the current inventory situation and expected needs in the coming months.

This limited view of inventory results in a predictable issue: too much or too little of certain products. In many cases, that means an oversupply of less popular items and too few of the fastest movers.

Both situations reduce available cash—overstocks eat up money that would be better spent elsewhere, and out-of-stocks kill potential sales. Excess inventory is usually offloaded at a discounted price and the company is lucky if it’s even able to recoup its initial investment.

Finance is another key piece of this equation. These same companies often lack a system to easily and accurately forecast future sales and expenses. In their early years, companies often get by with spreadsheets and a spreadsheet wizard on staff, but that quickly becomes unsustainable as they grow. They need a more efficient, reliable way to track sales and costs so they can see expected cash flow on a weekly or monthly basis. Without a cash flow forecast, businesses are flying blind and will realize they don’t have money to purchase new inventory when they need it. They’re forced to either seek financing to cover inventory purchases or absorb the financial hit of missed sales.

CFOs missing any of these components are left without the information they need to both maximize cash flow and make the best use of the money they have available.

How Does Safety Stock Impact Cash Flow?

Recent supply chain problems have highlighted the importance of safety stock, the inventory a business carries to cover demand beyond what it anticipated. Although it may be easier to overlook, safety stock can also impact cash flow.

This extra stock could have a negative effect on cash flow by tying up more money in inventory that would be better spent elsewhere. On the other hand, safety stock can boost cash flow by capturing sales you would’ve otherwise missed due to delays in the supply chain. So how can you strike the right balance? Monitor safety stock and update the appropriate levels for different products regularly. Too often, safety stock levels go unchecked and are no longer reflective of the daily use figures in the safety stock formula. In some cases, inventory needs change frequently.\

Safety stock = (Maximum daily usage × Maximum lead time) − (Average daily usage × Average lead time)

Optimizing safety stock levels will ensure you don’t have too much backup inventory for an average seller and too little of something that is seeing a steady uptick in sales. Ultimately that should give the CFO more money to invest back into the business.

Visibility Enables Smarter Purchasing Decisions

When it comes to inventory, a finance executive has two goals: buy the right products to increase the sell-through rate and minimize inventory-related losses. When that happens, the organization has more money to pursue initiatives that will fuel future growth. Accomplishing that can be boiled down to answering these five questions:

Here’s how you address each of these questions to build a more calculated, effective inventory plan:

  • When will I have money to spend on inventory? (Budgeting)
  • What products should I buy, and what am I running out of? (Merchandise planning)
  • Where do I need the inventory? (Inventory allocation)
  • What items will I run out of, and when? (Supply planning)
  • How can I buy more fast-moving and less slow-moving inventory? (Open-to-buy plan)

Budgeting

Before a company can create a purchasing plan, it first must know how much money it has to spend and how those funds will be distributed over the course of the year. That budget is of course based on a sales forecast, as revenue enables the procurement team to spend on additional inventory. Forecasted expenses and revenue can be broken down week-by-week or month-by-month to estimate cash flow.

Spreadsheets won’t cut it when you’re trying to create these detailed budgets and forecasts—and keep them up to date. You need a robust planning solution that can pull operational and financial data from your ERP system to create forecasts.

These projections should include base-case, best-case and worst-case scenarios that the user defines. Those alternative scenarios could affect the forecast you ultimately use as the basis for the budget.

Merchandise Planning

Once you’ve mapped out demand and how it’s spread across a certain period of time, you can establish a merchandise plan. A merchandise plan lays out what the business must buy or build in order to meet expected demand. What specific items does it need and in what quantities to satisfy sales projections?

This is where an inventory management system shows its value. It tells you what products you already have available, which affects the amount you need to order. An inventory system should also monitor stock at every stage before it reaches you, from pending purchase order to fulfilled to in-transit to delivered.

Inventory Allocation

Once a products business knows what it needs, the next objective is figuring out how that inventory should be allocated across different locations. These locations could be stores, warehouses, distribution centers or facilities managed by partners (like an Amazon or 3PL warehouse). A number of factors could go into allocation decisions. Product assortment and demand for certain items could vary greatly depending on the specifics like location, season, size, color or a host of other attributes.

Look for an inventory management system that will display current levels across all inventory locations. This solution should also track KPIs like turnover rate, sell-through rate, days on hand and whatever other metrics matter most to your company. All of this information helps get the right inventory in the right location, increasing cash flow by minimizing the chances of running out in one place and having too much stock in another.

Supply Planning

The next step is supply planning, which brings together projected cash flow and inventory needs. At this point, you know what you need and how much you need, so you can begin to think about the timing of purchase orders. Compare forecasted sales to projected cash flow to manage timing. Consider lead times, favorable volume discounts and payment terms as you build the supply plan. This allows you to foresee any cash shortfalls. It’s far better to realize there’s a problem in advance than scrambling for a quick fix at the last minute.

The combined power of inventory management and planning software makes it possible to time purchases appropriately. In addition, an inventory or procurement system makes it easier to schedule out purchase orders and keep them organized with all order and vendor information in one place. This tool makes it easier to keep track of what inventory is coming when.

Open-to-Buy Plan

The final piece of this approach is an open-to-buy plan. Your purchasing team should use this plan to make sure it’s spending available cash on the right items by uniting the financial forecast, demand plan and supply plan. Open-to-buy establishes a budget for purchases based on inventory turns (i.e. how quickly it’s selling) and the ideal amount of stock to carry. Here’s the formula for open-to-buy:

Open-to-buy = Planned sales + Planned markdowns + Planned end-of-month inventory − Planned beginning of month inventory

Although open-to-buy can be calculated in units, it’s more common to input everything in this formula in dollars. Figures are usually monthly, but could be adjusted for another time period like weeks.

Is the Price Right?

As you think about maximizing the return on inventory investments, pricing is another aspect CFOs should pay attention to. The right price point maximizes margins without curbing demand, thus increasing available cash. Optimal price points also increase the chances of selling through inventory at full price and limit the need for clearance discounts that eat away at margins. That boosts gross profit and ultimately cash.

In other words, it’s valuable to dedicate time and resources to determining the right price point for the goods you sell. Data can be revealing, and it may make sense to test different prices to see how they affect demand. If one item has taken up too much valuable warehouse space for too long, try a price cut. If something else is flying off the shelves, a modest price increase might make sense.

Price optimization should be an ongoing exercise rather than a set-it-and-forget-it activity. This is especially true as more companies face price increases from suppliers and must decide how much of that can be passed onto customers before it hurts demand.

For clarity, let’s walk through an example. A retailer has forecasted sales of $20,000 for footwear in June, will run promotions worth $800 on those items, wants $30,000 worth of this inventory at the end of June and expects to start June with $35,000 worth of inventory. The open-to-buy formula would look like this: $20,000 + 800 + $30,000 – $35,000 = $15,800. That means the purchasing department should spend no more than $15,800 o n footwear that month.

Open-to-buy plans can be as broad or as specific as you need them to be, which is part of what makes them so valuable. For instance, the entire company could have a total open-to-buy budget for the month that’s then broken into departments and product categories within those departments.

An open-to-buy plan acts as a check on purchasing managers by giving them specific spending limits for each product category or item. The reality is most buyers don’t know the details of your financial position in any given week or month, and some will buy items that, based on simply a hunch, they think will take off. This plan mitigates that risk by ensuring inventory dollars are spread in a logical manner, maximizing investment in hot sellers and minimizing investment in slow movers.

There is always room for adjustment within an open-to-buy plan. If sales overperform in one department and underperform in another, the former may take a portion of the latter’s budget to make sure it doesn’t run out of product. That type of flexibility can make a big difference to the bottom line.

Planning software can help build open-to-buy plans and can be configured to automate these calculations. Leading systems can connect inventory and financials to show how sales of various goods contribute to the bottom line with just a few clicks.

A Superior Approach to Inventory Planning

It’s not hard to see the link between inventory and financial performance, yet it doesn’t always earn the attention it should. Inventory management may not be the first place a CFO would look when trying to ramp up profitability or determine the cause of disappointing results. Yet inventory and cash flow go hand-in-hand, and businesses that understand the two are mutually dependent set themselves up for success.

Optimizing inventory has become far more difficult since COVID-19 broke the just-in-time supply chain. Many companies can no longer wait until the last minute to order goods and now carry more items as a buffer in light of the constant delays and disruptions. This need to purchase and hold more inventory, combined with rising costs, has made cash scarcer for many midsized companies. But that is all the more reason for CFOs to ensure their employees are making the most of the cash they do have.

Better purchasing decisions require a strategic plan, but it’s impossible to create that without comprehensive data in hand.

This is where the value of NetSuite’s unified ERP system truly shines because it provides accurate, detailed and accessible data. It keeps all information related to financials, inventory and orders in one place so it’s easy to find what you need.

Companies can use this data to first create detailed forecasts and budgets with NetSuite Planning and Budgeting to start planning future purchases. NetSuite Planning and Budgeting pulls information directly from NetSuite ERP to eliminate concerns about whether it’s accurate or up to date. From there, NetSuite Inventory Management monitors inventory levels and location in real time, down to the SKU level. It can track products across multiple locations and incoming orders, providing all the details necessary to build a merchandise plan and effectively allocate inventory. The information provided by these two NetSuite applications allows the business to build a supply plan that ensures it has money available for purchase orders when it needs products. NetSuite Inventory Management and Planning and Budgeting can also give you all the numbers needed to calculate open-to-buy.

Inventory must be carefully managed for the business to have the money it needs, when it needs it, so it can make the most of opportunities to grow. While CFOs may not oversee operations in most organizations, they still must realize the impact purchasing and inventory management have on increasing, maintaining and protecting cash flow. Remember, inventory is money in a different form, so items that don’t generate a positive return represent missed opportunity.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Related Post

CFO Guide: 4 Inflation Metrics to Watch Now

CFO Guide: 4 Inflation Metrics to Watch Now

Inflation is here, and unless you were managing a business in 1982, you’re not used to planning for it. Inflation averaged just 1.7% in the 10 years prior to 2020 – that is below the Fed’s 2% objective and was a key factor in its loose monetary policy. Inflation jumped to a four-decade high of 7% at the end of 2021, and now the Fed is re-evaluating its policies. It has business leaders worried. Nearly 60% of respondents ranked inflation as their top concern in CBIZ’s Main Street Index survey, conducted between Nov. 30 and Dec. 31, 2021. And in The Conference Board research group’s survey of 900 CEOs, more than half said they expect price pressures to persist until at least mid-2023.

For business leaders, this means that tracking external inflation metrics is now a priority, as it allows them to ensure the company is adjusting appropriately to swings in prices of goods and services. Here, we’ll outline the three main measures for tracking the inflation rate provided by the federal government, as well as supplemental indicators that could prove helpful in predicting trends and guiding decisions.

Consumer Price Index

Overview

The most widely-quoted measurement of inflation, the Consumer Price Index, or CPI, is published by

the Bureau of Labor Statistics (BLS) monthly. It measures the average change of prices paid for a basket of consumer goods and services, gauging inflation as experienced by consumers in their dayto- day living expenses.

The CPI is especially notable because it’s used to adjust Social Security payments and as the reference rate for some financial contracts such as Treasury Inflation-Protected Securities (TIPS) and inflation swaps. For consumer-facing companies, it provides guidance on what the market will bear in terms of price increases and can therefore be an important part of scenario planning. Raising prices significantly more than the inflation rate will most likely result in consumers cutting back on or cutting out your product.

Data Source

The BLS uses a survey of American families called the Consumer Expenditure Survey to determine which items go into the basket and how much weight to assign to each item.

Calculation

The CPI is based on the fixed-weight Laspeyres price index and calculated using this formula:

CPI = Cost of Market Basket in Given Year / Cost of Market Basket in Base Year x 100

What Is the “Basket”?

Inflation measures often use the term “basket” to refer to a select mix of goods and services. Also called a market basket, consumer basket, representative basket or commodity bundle, this is a rarely changed list of items whose prices are tracked over time to measure inflation in a given economy or market.

The CPI basket includes over 200 categories of goods and services, which the BLS classifies into eight major groups: food and beverages, transportation, housing, medical care, apparel, recreation, education and communications and other goods and services. While the CPI includes taxes that are included with the purchase of specific goods and services, it does not include unrelated taxes like income and Social Security taxes. It also does not include investment items like stocks, bonds and real estate.

Population

The CPI reflects the spending patterns of two population groups: urban consumers and urban wage earners/clerical workers.

The BLS defines “urban consumers” as people in households in all areas of the United States except those in rural nonmetropolitan areas, in farm households, on military installations and in institutions such as prisons and mental hospitals. This represents about 94% of the total US population.

“Urban wage earners and clerical workers” refers to households in which more than half of the income comes from clerical or wage occupations, or those paid an hourly wage, and at least one of the household’s earners has been employed for at least 37 weeks during the previous 12 months. This group represents approximately 28% of the total US population and is a subset of urban consumers. This calculation is used annually to set the Social Security cost-of-living adjustment.

Variations

There are several variations of the CPI, most notably the Core CPI, CPI-U and CPI-W.

  • Core CPI: Excludes food and energy due to their volatility.
  • CPI-U: Takes into account only urban consumers.
  • CPI-W: Reflects only urban wage earners and clerical workers.

The BLS also provides a seasonally adjusted CPI, which removes the effects of seasonal factors such as weather, the school year, production cycles and holidays.

Supplemental Indicator: Treasury Inflation- Protected Securities (TIPS)

When tracking longer-term inflation trends, Treasury Inflation-Protected Securities, orTIPS, can provide valuable insights. TIPS are U.S. Treasury-issued bonds whose value moves with inflation as measured by the CPI and are available with 5-, 10- and 30-year maturities. If inflation doesn’t materialize while TIPS are held, the utility of holding TIPS decreases. Tracking investor sentiment and activity around TIPS indicates the anticipated duration of inflation. If investors expect inflation to die down, activity around TIPS will decrease in turn.

Headline vs Core Inflation

Headline inflation measures the total inflation within an economy, including the prices of commodities such as food and energy.

Core inflation excludes highly volatile components, primarily food and energy.

While it is the most common economic measure of inflation, the CPI has its limitations. The standard version of the CPI is the most all-encompassing but still isn’t reflective of the entire population since it’s based on urban consumers.

It also fails to reflect substitution bias, the phenomenon in which price changes drive changes in consumer buying behavior. For example, a consumer might choose to buy lower-priced clothes or shift purchases away from clothes and toward food as inflation picks up. Because expenditure weights are held constant for 24 months, the CPI doesn’t immediately reflect these shifts in consumer behavior.

The CPI also takes time to account for any new innovation. So even if a newer product represents a considerable portion of consumer expenditures, it may be years before it is included in the economic indicator.

Personal Consumption Expenditures Price Index

Overview

Another commonly used indicator of inflation is the Personal Consumption Expenditures Price Index or PCEPI, also referred to as the PCE Price Index. It serves as a measure of the prices that people living in the US, or those buying on their behalf, pay for goods and services. Released monthly by the U.S. Bureau of Economic Analysis (BEA) in its Personal Income and Outlays report, the PCEPI is the Federal Reserve’s preferred inflation indicator when setting monetary policy.

Data Source

The PCEPI is based on BEA data around personal consumption expenditures collected from a wide

range of sources including the U.S. Census Bureau, administrative and regulatory agencies and private organizations such as trade associations. The BEA determines the PCEPI by adding up dollars spent on all goods and services in its basket and comparing the total to the last month’s figures.

Scope

The PCEPI includes spending by and on behalf of people living in the US. “Spending on behalf of a consumer” can include relevant spending by the government, employers or nonprofits. For instance, whereas the CPI only includes consumer health spending, the PCEPI includes money spent by health insurance organizations.

Calculation

The PCEPI is calculated by adding up the current dollar value of PCEs in the BEA’s basket and comparing that to the total from the prior period’s figures. The BEA uses a price deflator to compare the value of all goods and services produced in the current period to the prices in the base period. The result is a measure of the change in consumers’ economic activity.

The PCEPI is based on the Fisher-ideal formula, which allows for changes in consumer behavior and changes that occur in the short term, preventing substitution bias.

The PCEPI is considered to more accurately reflect how prices affect consumer behavior. The modified Laspeyres formula used for the CPI is updated only every two years, so it assumes people continue buying the same items for a longer time period. As a result, the CPI’s reported inflation rate is often higher than the PCEPI’s. For example, the CPI-U increased an average 1.7% per year from 2010 to 2020, while the PCEPI increased an average 1.5% per year.

Population

Unlike the CPI, which only accounts for urban consumers, the PCEPI is considered representative of the entire US population as it covers both urban and rural consumers.

Versions

The PCEPI too has several versions, most notably the PCE Price Index, Excluding Food and Energy, also known as the Core Personal Expenditures Price Index (CPCE). The Federal Reserve tends to direct the majority of its focus here.

Limitations

The PCEPI is released monthly. However, some of the data sources used, like the GDP, are only released quarterly. In order to fill the gap, the BEA makes estimates based on other data sources like retail sales reports.

Unlike the CPI, which uses data reported straight from consumers, the PCEPI uses a range of data from households, nonprofits, corporations and the government. Depending on what you want to know, that additional data may not make the numbers more accurate for your purposes.

The PCEPI can also be substantially revised to adjust for factors like substitution bias. While beneficial in some scenarios, it gives an edge to the CPI for some purposes like contract indexation and TIPS.

More Resources

  • How to Increase Prices Without Losing Customers. If your team is deciding whether to pass inflation-related costs on to customers, then you’re not alone. Get the guide to raising prices while keeping your client base.
  • 3 Action Items for More Data-Driven Business Decisions. A mass of data from the economy’s wild two years should be fueling your business decisions. If not, now’s the time to make it happen.
  • Scenario Planning for What Comes Next. In this free on-demand recording, other business leaders discuss how they’re using scenario planning models to better work through short-term challenges and plan for an unpredictable future.

Producer Price Index

Overview

Released monthly by the BLS, the Producer Price Index, referred to as the PPI, measures the average changes in prices that domestic producers receive for their goods and services. Unlike other indicators, the PPI gauges inflation from the viewpoint of the industries that make the products, instead of the consumer viewpoint. Unlike the CPI or PCEPI, which are both lagging indicators, the PPI is a leading indicator of inflation. As such, it’s a great aid to scenario planning. In recognition of the value in planning, the BLS gets very granular in its calculations so that business analysts have data specific to their industry and need.

Data Source

The BLS collects PPI data. It typically selects producers by systematically sampling a listing which all firms file with the Federal-State Unemployment Insurance Program.

Once a business is selected, a field economist narrows the scope to specific goods or services for which prices will be reported. The selected businesses then report prices monthly until a new sample is selected for the industry, usually after seven to eight years. Each month, the BLS receives over 100,000 prices from 25,000 reporting companies.

Supplemental Indicator: Commodity Costs

If the PPI is a leading indicator, then commodity costs are the lead-in to the leading indicator. As prices for materials rise, costs for producers rise. These costs tend to get passed down to the consumer, raising both CPI and PCEPI.

By tracking commodity costs, particularly around oil, companies can get a sense of where inflation is headed. However, narrowing the scope to the relevant materials for the business is of course a better gauge of industry-specific inflation. Numerous sources provide commodity cost tracking, including Bloomberg, the St. Louis Federal Reserve and, on a global basis, the IMF. Also, lots of exchanges trade futures for most every commodity used in business. In the US, the Chicago Mercantile Exchange Group comprises the largest set of exchanges including the Chicago Board of Trade and the New York Mercantile Exchange.

Scope

The BLS produces approximately 10,000 PPIs for individual products and groups of products each month, covering about 535 individual industries and over 4,000 specific products. That data is divided into three categories:

  • Industry Level Classification: Measures the cost of production at an industry level. Published in accordance with the North American Industry Classification System (NAICS).
  • Commodity Classification: Measures the cost of production based on product similarity, end use or material composition. Industry of origin does not play a role. The classification system used is unique to PPI and publishes more than 3,800 commodity price indexes for goods and about 900 for services.
  • Commodity-Based Final Demand-Intermediate Demand (FD-ID): Regroups commodity indexes into sub-product classes that look at the buyer of the products. Final demand measures price change for commodities sold for personal consumption, capital investment, government purchases and exports. In contrast, intermediate demand measures the price change for goods, services and construction products sold to businesses as the elements of production.

Calculation

Like the CPI, the PPI uses a modified Laspeyres formula, which compares the base period of revenue for a set of products to the current period revenue for the same set of products.

Mathematicians and economists will delight in the PPI formula:

Ii = [(ΣQOPO (Pi /PO)) / ΣQOPO] x 100

Po shows base year commodity price; Pi is current commodity year price; and Qo is quantity of commodity sold during the base year. Currently, some PPIs have an index base set at 1982 = 100, while the remainder have an index base that corresponds with the month prior to the month that the index was introduced.

Boiled down, the formula divides a representative basket of goods by a base price for the same basket. A result of more than 100 shows how much the price has increased since the base price was set. A number below 100 indicates the price has declined.

Sample items are also weighted by size and importance in two steps. First, individual items are weighted by the producing establishment’s revenue for the product line. Then, when the individual goods and services are combined to create aggregate indexes, the method for weighting can depend on whether they’re classified by industry, commodity or FD-ID. However, the data used to establish weighting comes primarily from the Census Bureau’s Economic Census and are updated every five years.

Population

PPIs are published for the output of almost all industries in the goods-producing sectors of the US economy. While more indexes for the services sector are gradually being introduced, the PPI program currently covers approximately 72% of the service sector’s output, according to the BLS.

Variations

The BLS publishes some seasonally adjusted indexes in addition to the unadjusted versions.

Seasonally adjusted versions include:

  • All FD-ID indexes
  • Certain three, four and six-digit commodity classification series, should they show seasonality that is supported by economic rationale Indexes for two-digit commodity groupings and eight-digit individual commodities, as well as industry classified indexes, do not have seasonally adjusted versions.

There is also the Core PPI, which excludes the more volatile components of food and energy.

As noted previously, the PPI only accounts for about 72% of services. It also doesn’t cover imports.

The Employment Cost Index

Overview

To this point, we’ve discussed measures of goods and services, as well as the pricing of both finished goods and materials that go into finished goods, as lagging and leading indicators of inflation. The cost of labor for the sampled goods and services is obviously baked into the prices discovered in creating the indexes. But as every business leader can attest, the effect of labor costs on the price charged is not an efficient factor to analyze. Most businesses do their best to absorb some labor costs, often opting to pay more to fill certain roles instead of raising prices.

That makes the BLS’s Employment Cost Index a very good leading indicator of inflation pressure, particularly now as the available workforce isn’t meeting the demand for workers. BLS provides a detailed explanation of ECI, covering its methodology and scope. The index is formulated to look well beyond hourly rates paid to workers and into benefits that include health care, paid leave, retirement savings, severance, stock plans and more.

The Fed also creates measures that go beyond the BLS’s average hourly earnings (AHE) metrics with its own index called common wage inflation (CWI). CWI shows lower quarter-to-quarter variability and tends to predict wage inflation to be a bit higher than other indexes. CWI is truly a macroeconomic indicator intended for policymakers’ use. For business leaders, that makes it a good index to watch, but likely not as useful as ECI, which shows quarterly fluctuations pertinent to business planning.

Data Source

As the name indicates, collecting data for the Employment Cost Index is a primary function of the BLS. The BLS’s National Compensation Survey is an ongoing effort that involves surveying thousands of organizations about their labor costs in tens of thousands of job categories.

Aggregate indexes like ECI and the related Employer Costs for Employee Compensation are calculated quarterly and released about two months after the subject quarter ended.

Scope

As mentioned, the National Compensation Survey informs BLS data down to fairly precise job titles. Interested in compensation data on accountants and auditors in your area? Find that job category in the Standard Occupational Classification system, and you’ll see that the job code is 13-2011. Put that into the BLS search tool, and you’ll get a number of resources. The top one offers a page of rich information on that job title in various industries and geographies. The challenge is that the data is from 2020, so you’ll need to combine it with other data sources to understand movement in compensation for that job. The BLS releases new data 10-12 months after the date of estimate. So, 2021 data will be released in the spring of 2022.

The State of Play

That other data will be hard to find. Job sites and HR organizations have some, but as it stands, at least now in the US, finding accurate and current salary data is very difficult since that data isn’t regularly disclosed.

The US has seen a shift in practices on salary transparency over the past three years. At one time, discussing pay with colleagues was often forbidden by employers. The National Labor Relations Act made the practice illegal. Now, Colorado, Rhode Island, Connecticut and Nevada are requiring that salary ranges accompany job posting in their states. New York City joined the club in 2022, requiring that postings from any company with more than four employees list a salary range. Other states have laws requiring that employers disclose pay ranges when prospective employees ask.

Informing Strategy

While it would be great to know the movement in compensation for precise job titles over the past year when you’re hiring into vacancies, that level of precision is not always required for planning purposes. You can find BLS employment cost trends data on an industry-by-industry basis, which typically lags by a quarter. The chart below shows the sharp increase in total compensation for hospitality workers in the past 18 months.

The Bottom Line

This bout of inflation will be with us for a while. However, by tracking the right indicators, businesses can take action to battle its effects.

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