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Looking Beyond QuickBooks

Eva on September 9, 2022

  • NetSuite

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.
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Related Post

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

Eva on September 9, 2022

  • NetSuite

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.
Book a consultation

Related Post

CFO Guide: 4 Inflation Metrics to Watch Now

Eva on September 9, 2022

  • NetSuite

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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Unifying Financials & Inventory

Eva on September 8, 2022

  • NetSuite

Unifying Financials & Inventory

We have all heard the phrase “cash is king.” It is the mantra most companies live by. It is also why purchasing an application to manage money is usually the first business software investment companies make.

As a starter system, QuickBooks is a logical and economical choice. At a high level, QuickBooks provides the basic functionality any business needs in a financial management system: enabling the management of a company’s chart of accounts, along with a systematic method of managing its relationships with vendors and customers through accounts payable and accounts receivable respectively. Providing this core functionality at a reasonable price point has made QuickBooks the system norm across many industries.

“To run QuickBooks and Fishbowl at the same time is a nightmare for logistics and it’s a nightmare for my accountant.” – WINGTASTIC

However, as innovation evolves faster than ever, heightened customer expectations and increased competition mean manufacturing companies can no longer rely on the business models or business management systems of the past. The reality is that times have changed. The internet has provided a platform upon which to build entirely new business models. Inefficiencies and wasted time on routine tasks, such as the monthly close, are no longer accepted. Business decisions are now driven by key performance data, not historical practices or best guesses. Real-time visibility and insight can now be the difference between thriving and barely surviving.

Though most recognize these changes and the need to innovate to keep pace, companies are reluctant to connect their business systems to that vital innovation. Some are daunted by the task of overhauling existing systems. Others are convinced they will not be able to find a solution that can meet their needs in an affordable way, choosing to instead make do. Those decisions can turn out even more costly in the long run.

Here are four signs that QuickBooks might be failing your business:

  • It’s too hard to find out what’s happening across your organization in real-time.
  • Limited visibility into key metrics.
  • Limited functionality won’t keep pace with modern requirements.
  • Inability to scale as you expand to multiple locations.

FISHBOWL: AN INVENTORY MANAGEMENT ADD-ON OR A TEMPORARY BAND-AID?

For companies in start-up mode or for those who, despite their growth or maturation, choose to make do with QuickBooks, the next technology investment after financials is most often inventory management.

An Intuit Gold Level partner boasting thousands of customers, Fishbowl is an inventory management add-on solution for QuickBooks users. Claiming to provide advanced inventory capabilities through a seamless integration to the QuickBooks system, Fishbowl has become common across all product industries. However, Fishbowl users quickly realize that an add-on inventory management solution does not make an ERP system.

Here are four signs Fishbowl might be limiting your manufacturing business:

  • Frequent and time-consuming IT support required for system updates and QuickBooks integration.
  • Reporting is limited and not in real-time.
  • Inability to customize the system to your business model.
  • No supply chain forecasting or budgeting capabilities.

If your company is struggling with these challenges as a result of its QuickBooks and Fishbowl systems, it may be time to consider an integrated business management suite.

NETSUITE: A SUITE APPROACH

NetSuite believes in the power of a unified suite of applications that spans the whole of the business, linking key business processes together on the same platform. A suite approach allows the whole company to view operations as a single version of the truth. Furthermore, predefined roles and dashboards that are oriented around a user’s day-to-day tasks allow for the most efficient consumption of information throughout the entire organization.

Having inventory and financial data on the same platform provides manufacturing companies with a competitive edge with the ability to plan effectively, execute predictably with customers and minimize labor costs and errors associated with manual reconciliation.

THE BENEFITS OF A CLOUD SOLUTION

In addition to our suite approach, NetSuite is a true cloud platform. It is important for companies to understand that a cloud-based vendor doesn’t just offer software, but also a service. This means that NetSuite takes responsibility for not only the software it supplies, but the underlying technical infrastructure needed to access the solution.

That includes the server hardware and database maintenance and administration, document storage, technical upgrades, and the ongoing enhancements customers need. That is an entirely different way of providing a system than what has been traditionally offered where, for all practical purposes, it is the customer’s responsibility to upkeep their systems on an infrastructure they must initially purchase, but also maintain.

A vendor offering Software-as-a-Service is on the hook for all aspects of that service, which in turn means the vendor must continuously earn the trust of its buyers, backed by meaningful service level agreements. It doesn’t serve a modern cloud provider’s interests to do anything other than assure customer success. That is a win-win in anyone’s book, but again, fundamentally different than the old way of acquiring and using software.

A well-implemented cloud-based system means that financial activities appear as soon as they are triggered. That, coupled with ‘anywhere-anytime’ access means that decision makers can quickly act upon both adverse and favorable performance indicators. In that sense, decision-making becomes an activity where those tasked with executing on the company’s goals and strategy are able to do so with information that is akin to looking through the front windshield of a car, rather than constantly worrying about what is in the rearview mirror.

The combination of these demonstrable benefits means that a well-executed move to cloud results in a much better and predictable cost of operation than is possible with on-premise systems.

LEADING COMPANIES HAVE MADE THE SWITCH TO NETSUITE— WILL YOU?

Industry leading manufacturers are making the move from QuickBooks and Fishbowl to NetSuite and are seeing demonstrable benefits as a result.

For example, in 2017, Ron Dickison aka “Rockin’ Ronnie,” a professional drummer for 40 years and a serial entrepreneur with nine companies to his name, was determined not to make the same mistake with Wingtastic, a wing nut manufacturer, that he did with a previous company. The QuickBooks and Fishbowl systems he used at this lighting company led to logistics nightmares and expensive accounting services. A rigorous inspection of more than 30 different software evaluations led Dickison to NetSuite. Its ability to get up and running quickly to support Wingtastic but also continue to meet the company’s needs as it grew made NetSuite the top choice.

“Every day I have to deal with stuff in my business— factories, customers, suppliers. NetSuite is just in the background doing what I need so I don’t have to worry about it.”- WINGTASTIC

With NetSuite in place managing Wingtastic’s financials and inventory, Dickison is now focusing on adding new Wingtastic products to the mix. In the near future, he has plans to extend NetSuite’s cloud ERP to support 3,000 SKUs at his lighting company and to provide a unified view of all operations at three new ventures he’s launching.

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Easing the Pain of Physical Inventory Counts

Eva on September 8, 2022

  • NetSuite

Easing the Pain of Physical Inventory Counts

A Practical Guide to Physical Inventory Counting and Cycle Counting.

Every company that buys, sells and/or uses physical products deals with the pains of keeping accurate inventory records. The recent uptick in ecommerce sales, evolving customer preferences and unanticipated supply chain disruptions have converged to make inventory counts especially critical for manufacturers, distributors, wholesalers, retailers and ecommerce companies.

Inventory counts are an integral part of any organization’s internal control environment and tend to be an all-hands-on-deck, manually-intensive affair that take place once a year. The process often extends a week or more, requires operational shutdowns and interrupts fulfillment processes as employees work to count one of the business’ most valuable assets: its physical inventory.

In order to make accurate budgeting, operating and financial decisions, managers and other stakeholders need accurate inventory count data to work with. Publicly-traded companies, for example, must ensure their financial reports are accurate. That means auditors and corporations must perform physical inventory checks before the last day of the company’s fiscal year.

Physical inventory counts are conducted manually, and are therefore both time-consuming and error-prone. When someone has to physically touch or scan inventory during the put-away, inventory check or pick processes, for example, errors are bound to surface. Finding, counting and recording each item is time consuming enough, but the fact that those items might be stored in multiple places throughout the warehouse or storeroom adds even more time to the process. Even when the physical count is completed, rectifying any discrepancies, figuring out what went wrong and then implementing procedures to avoid repeat mistakes takes even more time.

While physical inventory counts are a necessary evil, they needn’t be so significant a burden. This white paper will explore the key inventory count challenges that companies are dealing with now, show how regular, scheduled cycle counting year-round can ease these pains, and discuss how a unified, cloud enterprise resource planning (ERP) solution enables high inventory accuracy year-round.

Why Companies Need Physical Inventory Counts

Any company with a product-centric supply chain likely has anywhere from 20% to 30% of its assets tied up in inventory holding costs (depending on the specific industry). Those holding costs include not only the value of the products themselves, but also the cost of warehousing, controlling and insuring those goods. Ineffective inventory control processes can inflate this percentage, but good inventory management processes can help to minimize these costs.

Physical inventory counts are an essential part of keeping inventory records accurate and current.

Up-to-date inventory records provide for better forecasts of sales and purchases and ensure that organizations have the right amount of product on hand to be able to fulfill customer orders, make their own products or both.

Performing a physical inventory count ultimately benefits customers who don’t want to deal with uncertain stock levels in this era of instant gratification. With updated inventory data in hand, companies can fulfill orders promptly, replenish as needed and avoid costly overstock situations. They can also more effectively plan for losses (i.e. due to theft or breakage).

Every day that an item remains in inventory, its value decreases. Over time, the cost to stock the item begins to outweigh its actual value. By using scanners (or other stock-counting technology tools), immediately addressing inventory discrepancies and using inventory management software, companies can improve their counting accuracy and significantly reduce the amount of time required to conduct this vital project.

Other important reasons to perform regular inventory counts include:

  • To check and balance inventory levels. The physical inventory counts, which serve as a check and balance on cycle counting, help managers identify any discrepancies between cycle count reports and what items are actually in storage.
  • For theft monitoring and management. The difference between what appears in the inventory management system and what is present can be due to missing, stolen or broken items. Unless staff manually enter the items when these scenarios occur, the system can’t recognize them.
  • To develop an accurate business budget. Companies with precise inventory counts can better plan their budget for the coming year’s orders.
  • For accurate earnings reports. Inaccurate inventory means a company will report an incorrect amount for the cost of goods sold, the gross profit and net income. Public companies are accountable for providing correct figures in their annual reporting to their stakeholders.

Challenges With Physical Inventory Counts

Tracking the volume of goods purchased and sold is straightforward in theory but not always easy to master. It also includes inventory turnover rates and actual product purchase costs, both of which can inflate a company’s total inventory investment. Organizations must have enough inventory on hand—and in the right locations—to be able to meet demand while avoiding both stockout and overstock situations.

The biggest headaches of physical inventory counting include the need to manually count inventory—a process that typically requires paper count cards, sheets and pencils. What’s more, some businesses may have limited staff and may need to bring in temporary or part time staff to help deal with the count, adding people unfamiliar with the business and driving up costs. While the required materials may be cheap enough, this approach takes a lot of time, introduces errors and requires a shutdown of the physical facility. Companies can reduce some of this complexity by adding RFID, barcodes or mobile devices to the mix, but even the electronic approach to physical inventory counting requires additional time and resources to complete and is not entirely error free.

And, if not done properly, physical inventory counting not only eats up time, it can introduce errors. Once they’re transferred to the company’s annual financial report and other important statements, these errors can impact the organization’s bottom-line profitability and cast doubt over its stated financial results.

Comparing the Inventorying Options

Businesses usually perform their annual physical inventory count before compiling their annual financial reports, but the problem is that performing an inventory count once a year doesn’t always yield the most accurate results. The best way to ease the pain of physical counts is by conducting regular, scheduled cycle counting throughout the year and at predetermined frequencies. These counts can be conducted manually or electronically, using cycle counting or by conducting a full inventory count.

What is Cycle Counting?

Physical counts can’t be avoided, but there are ways to offset the burden of this annual exercise while saving companies time and allowing them to allocate labor resources to more important tasks. One way businesses can ease the pain of physical inventory counts is by using a process known as cycle counting. Cycle counting is systematic method for counting portions of a company’s stock. As an inventory management option, cycle counting focuses on counting items in a designated area of the warehouse without stopping operations to perform a complete physical inventory. Because of this, cycle counting has become a popular inventory management strategy for companies across all industries. It is often automated and performed at least once per quarter.

Benefits of Cycle Counting

With cycle counting, issues can be identified and addressed quickly as they surface, versus just once a year during (or after) a physical inventory count. This helps organizations significantly reduce the amount of time spent on those annual counts—a major competitive advantage in an environment where customers expect orders to ship same-day and arrive within shorter and shorter timeframes.

Businesses that automate cycle counting typically drive faster, more accurate counting. Using RFID and barcodes, for example, is much easier than jotting down stock numbers and/or scanning inventory sheets to find the right item number. Other key benefits of automation include simplified shipping and receiving processes, better visibility over on-hand inventory, better management of missing or stolen merchandise and overall improved inventory management (i.e. less need for “just in case” overstock since your current inventory levels are always right at your fingertips).

Other key benefits of cycle counting include:

  • Higher order fulfillment rates
  • Better customer service levels
  • More accurate inventory assessments
  • Higher sales
  • More time between physical counts
  • Fewer errors
  • Less inventory write-offs and obsolescent inventory
  • A more efficient operation overall
  • Possible elimination of annual counts
  • Improvement of the closing process
  • Decreased audit fees
  • No employee overtime costs
  • Ability to quickly detect product thefts

Adopting Perpetual Inventory Systems to Limit Freezes and Shutdowns

Companies with large amounts of stock (e.g. wholesalers, distributors nd that “freezing” stock in order to count inventory to be quite disruptive. As a supplement to these annual inventory counts, organizations can implement perpetual inventory systems that both appease their auditors and effectively reconcile their inventory numbers. While it doesn’t remove the need for a physical inventory county entirely, perpetual inventory systems use point of sale devices and scanners to record inventory changes in real time, making the physical count far simpler. This is important because the operation that shuts down completely for a week in order to count its inventory can find itself behind the competitive curve when it gets back up and running.

Which Industries Need Inventory Counting?

Retailers, manufacturers, wholesale distributors and ecommerce companies all have to count their inventory. Whether they use full, annual inventory counts or cycle counting, even companies with small amounts of stock need to know how much they have, which SKUs are languishing on the shelves and which ones need more frequent replenishment.

For example, stock-heavy companies like distributors would benefit from a perpetual inventory system that not only appeases their auditors, but also ensures products are in the right place, and at the right time, when companies need them. Where a periodic inventory system relies on occasional physical counts, a perpetual system continuously tracks inventory balances and automatically updates inventory records when items are sold or received.

An apparel company that has to accommodate frequent consumer preference shifts also needs a robust inventory counting approach, lest it get stuck with too many of “last season’s” garments. Using an upgraded inventory management system, apparel companies can make faster changes to their product mix, track the movements of new items and create space for them on the warehouse or retail floor.

Food and beverage companies and restaurant operators also need good physical counting processes. Dealing with a high volume of perishable goods, these companies have to take regular stock of the goods that are sitting in storerooms and warehouses—specifically those items whose shelf life may be coming down to the wire and ready to spoil.

Cycle Counting Best Practices

Even the most organized companies can run into inventory cycle counting challenges. For example, they might unknowingly introduce inventory errors when dealing with multiple locations, or run into issues like paperwork lags and outstanding transactions. When they’re not updated in real time, the counts can also generate false variances that will need to be addressed. To avoid these challenges, companies should clearly define their process, track their inventory accuracy and then aspire to a high degree of accuracy during the process.

When developing a cycle counting program, companies should factor in these three main inputs:

  1. Number of SKUs. Determine how many products or stock-keeping units you want to count at a time. Base what you choose to count on your overall number of SKUs, the number of high-value products, and what is reasonable to count in intervals.
  2. Available counting resources. Determine the number of available employees and how much time they can dedicate to counting stock. For example, some companies suggest employees use the time before shift end to count SKUs in their assigned areas. This timing takes advantage of the natural lull in employee productivity with relatively easy work. These employees should not have a stake in the accuracy of the numbers
  3. Counting Frequency. How often you count inventory depends on how many SKUs you want to cycle count in the year. For example, if you wish to count 1,000 SKUs per year, then count 83 per month, 21 per week and three per day, assuming you are only counting each SKU once annually. You may want to count high-value items more often, and don’t forget to factor in the time it will take for counters to record their daily SKUs.

With these inputs in place, companies can use these best practices to create a successful cycle counting approach:

  • Close all transactions for inventory items before the cycle count.
  • If using the ABC method—whereby companies classify inventory items based on the items’ consumption values—be sure to classify those items into the respective counting groups using specified, documented processes.
  • Count all products for all SKUs listed.
  • Decide what to count when. For example, it may make sense to count items that are of a high-value or that move quickly through the warehouse weekly. Count all other stock quarterly.
  • Identify the fastest moving items in the warehouse. Mark them as fastest to slowest to figure out how to classify items for future counts.
  • Dedicate specific personnel to counting teams, and ensure that those teams count all products at least once quarterly.
  • Immediately investigate any errors or discrepancies that may crop up (don’t wait until the end of the year to deal with these issues).
  • At least initially, perform counts twice to ensure that the numbers are correct, and have a supervisor check the counts against the inventory in the system.
  • Document everything, including the process itself, the changes and the results.

While physical counting once a year may seem like a viable option, cycle counting is less disruptive, provides more visibility into stock daily and can ease the stress of the physical count. By combining an inventory management system and warehouse management system (WMS) with regular cycle counts, organizations benefit from more accurate inventory levels, automatic prompts for items that need to be counted, the ability to categorize items based on volumes or value, improved quality assurance, and higher customer satisfaction rates.

Ready, Set, Go!

Counting inventory is a requirement for doing business. Regardless of how effective their replenishment, tracking and management systems are, companies must conduct regular checks of actual inventory levels for key items. Keeping an accurate item count can help reduce required safety stock, lower overhead costs and give companies more control over their assets.

Thanks to advanced technology, physical inventory counts have become easier, less intrusive and require less manpower. By replacing Excel spreadsheets or other manual inventory control systems with inventory control software, companies can more efficiently track their stock while reducing human error and saving time and money.

Using an inventory management system also ensures that companies always have the right amount of stock at the right locations to meet customer demand. NetSuite’s inventory and warehouse management solution helps inventory managers track and locate stock at a moment’s notice. The system also includes features such as artificial intelligence (AI), vendor managed inventory (VMI) and mobile device integration. The cloud ERP platform’s inventory count feature, for example, improves inventory tracking and provides increased control over key assets. It also allows companies to categorize inventory based on the volume of transactions and/or value, and enter regular periodic counts of on-hand item quantities to maintain inventory accuracy.

With its standard functionality, NetSuite not only helps organizations gain better control of their inventory, but it also extends those activities to its warehouse management solution (WMS) and mobile radio frequency (RF) devices.

With the mobile app, users can scan bins and items, automatically recording the cycle counts without leaving the floor. This makes auditing inventory less intrusive to daily work and reduces manual errors due to incorrect keying and lag time.

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7 Ways Cloud ERP Helps Organizations Build Resilience and Agility

Eva on September 8, 2022

  • NetSuite

7 Ways Cloud ERP Helps Organizations Build Resilience and Agility

Delivering organizational visibility, mission- critical data on a single platform and supporting collaboration across remote workforces, cloud enterprise resource planning platforms help companies make quick decisions in today’s unpredictable business environment.

When an unprecedented 10-year economic expansion came to a grinding halt in early 2020, a lot of companies were left scrambling to adjust their business processes, workforces and supply chains. Disruptive forces like trade wars, Brexit, global labor shortages and rising tariffs were already impacting multiple industries before COVID-19.

Yet, it doesn’t take a global pandemic to turn a company on its head and force it to rethink its business model, processes and the technology that supports its operations. Supply chain interruptions, catastrophic weather events and natural disasters can all exact a toll on organizational productivity and profitability.

In other words, companies can’t afford to get complacent about their business strategies. This white paper explores the key challenges that organizations are confronting right now and shows how a cloud enterprise resource planning (ERP) system can help them transform their companies into resilient organizations that can weather any storm.

Uncertainty is the Nature of Business

As you sit in the cockpit of your business, turbulent winds and unpredictable conditions are forcing quick and precise decisions that challenge your team’s collective wisdom and experience. Uncertainty is, after all, the nature of business. For example, a company may be expanding rapidly or facing market contractions; experiencing social, consumer and demographic shifts; traversing government regulations; or managing another force that promises to reshape its entire business landscape.

These shifts have been especially difficult for companies forced to rely on aging technology, poorly-integrated systems or software that doesn’t fully support their operations. Businesses with entry level accounting, spreadsheets and other point solutions likely spend valuable time and resources entering, aggregating and analyzing data with cumbersome manual processes. Companies running an older, on-premises ERP system are likely paying high annual software maintenance costs and in house IT salaries, but don’t even have access to the latest features and functionalities. That’s because most on-premises ERP vendors also have cloud offerings, the latter of which consume most of their R&D dollars and efforts. As a result, older ERP systems aren’t getting the same level of enhancement and modernization that their cloudbased counterparts receive.

Meanwhile, businesses running on-premises ERP systems are often reluctant to undertake upgrades because the disruption caused by broken integrations and customizations being overwritten, combined with the added demands on IT, mean the costs outweigh the benefits. With fewer resources to devote to enhancements and businesses reluctant to perform upgrades, users are left to their own devices to figure out how to achieve their strategic objectives with aging technology. These gaps may be hidden during prosperous economic times, when everyone is happy with their company’s performance and things are going well but come to the surface pretty quickly when disruption rears its head and begins to impact the bottom line.

For example, when mandatory office closings and shelter-in-place orders forced people to work from home, companies scrambled to find ways to support their suddenly-remote employees.

Those using traditional, on-premises software faced the greatest challenge, as demand for remote access to these systems put a strain on network capacity, introduced new security concerns and created a need for better access controls. Sluggish system performance and lack of effective collaboration tools led to a decline in productivity, as completing tasks that were relatively easy to perform while in the office became much more difficult. Lack of integrated solutions and difficulty penetrating departmental data silos made it harder to know what was happening in the business right when companies needed visibility the most. Cloud ERP overcomes these issues by allowing remote users to access the functionality and data they need to do their jobs from anywhere with an internet connection.

7 Ways ERP Helps Organizations Build Resilience and Agility

Meeting the challenges posed by economic upheaval, political instability, natural disasters and other disruptive events isn’t easy. Companies that succeed in these conditions, those that are able to adapt when others can’t, have built-in resilience. They have the ability to innovate new products and services quickly, modify business processes—or their entire business model—and respond to new opportunities as they emerge. These organizations recognize the importance of supporting their customers and team members during a crisis, communicating with stakeholders, and making decisions based on the most accurate, up-to-date information available.

While operating effectively in dynamic situations takes leadership, management ability and the right corporate culture, it also requires systems that provide a solid foundation and have the flexibility to adjust as business needs change.

By putting finance and accounting, customer service, procurement, inventory, supply chain management, warehouse management and order fulfillment on a single platform, ERP unifies core business operations, improves internal controls and enhances visibility into organizational performance.

Here’s how these capabilities help support more intelligent, resilient organizations and why companies need to begin evaluating their need for ERP now rather than later:

  1. Enables remote workforce management and collaboration.

The shift to remote work was already underway when the coronavirus pandemic forced a rapid acceleration of those plans for many businesses. With state and local shutdowns looming, companies had to quickly find ways to transition their workforces to comply with stay-at-home rules. Reality hit hard when organizations began to have difficulty managing critical process with a remote workforce. Closing the books is just one example. Companies using basic accounting software, like QuickBooks, or an outdated ERP system, learned quickly that their standard approach wasn’t feasible with the entire accounting team working from home.

Using NetSuite’s cloud ERP, the same accounting team can confidently review the data, make any changes and close the books remotely without having to be in the same physical location. The system’s checklist functionality lets users know exactly what steps need to be taken and ensures a smooth close process.

  1. Complies with accounting standards and regulatory requirements.

Complying with changing rules and regulations is a major headache for both public and private companies. Recent revisions to Generally Accepted Accounting Principles (GAAP) have pushed many organizations to reconsider processes typically handled with spreadsheets. Both ASC 606, the new GAAP standard for revenue recognition, and ASC 842, which changes the way companies report lease-related expenses, are already impacting public companies and will take effect for private companies soon.

Focused on eliminating off-balance sheet operating leases, the new lease accounting rules require companies to have leases lasting 12 months or longer listed on their balance sheets. This creates complications for companies that now must separate out the presumed interest expense of the asset and the lease expense and amortize them over the duration of the lease. Managing this process in a spreadsheet risks data integrity and data entry issues when moving that data into an accounting system. Modern ERP systems can factor in all of the variables and automate the process.

New revenue recognition rules present similar challenges and require companies to recognize revenue in a consistent manner, based on achieving defined performance objectives. This is something older accounting systems and older, on-premises systems weren’t set up to handle.

Cloud ERP solutions receive regular feature and capability updates that are automatically passed on to the user and can better handle these types of changes to accounting rules than older on-premises systems or entry-level accounting software, which typically issue less frequent updates. The potential for new rules and regulations always exist, but over the next several years as the global economy weaves and adapts, organizations should prepare for the possibility of greater regulation. Cloud-based ERP systems offer a clearer pathway to adapting to the new regulations.

  1. Gives all organizational departments a unified and accurate picture of the business.

As companies evolve, they tend to purchase software as a need arises. This leaves them with multiple systems from different vendors, each designed to perform a specific function or support a single department. Without complex and costly integrations, the data in those systems can only be accessed by a limited group of people. When critical information about customers, orders, inventory, capacity and more is spread across multiple solutions, aggregating it for analysis and decision-making is complicated and time-consuming.

Also, it’s nearly impossible to get a complete picture of what’s happening in the business. Turf battles often emerge over who has the more accurate data set. As a result, teams can’t work together efficiently, and both productivity and profitability suffer. For example, if sales wants to promote a product but leadership can’t see that there isn’t enough inventory to support the promotion, then orders will go unfilled and customers will be unhappy.

Cloud ERP solutions provide accurate, real-time data that helps teams collaborate more effectively. Using real-time inventory data, sales and marketing can develop promotions for products that are actually in stock, leading to increased revenue and happier customers.

  1. Drives quick reaction times.

Companies that are using disparate systems can’t react fast enough to changes in their environments. With a unified system, reports deliver insights in real-time Businesses with disparate systems often rely on IT or finance teams to gather and produce reports, which is often outdated by the time leadership sees it. Modern ERP systems feature rolebased dashboards that give employees immediate access to the data they need to do their jobs and the ability to drill down for further analysis without the need to call on IT for support. As a result, employees can make more informed, faster decisions and take advantage of new opportunities or realize and correct inefficiencies.

  1. Reduces operational risk.

Without proper accounting and procurement controls in place, organizations can easily fall prey to dishonest practices, including the abuse of power by employees or struggle to provide accurate details to investors, auditors or regulatory agencies. ERP helps limit these risks by embedding approval workflows into procurement, accounts payable and other financial processes, as well as by controlling access to system features and data based on user roles and individual permissions.

  1. Tracks unit economics, customer and project profitability.

A measure of profitability on a per-unit basis, unit economics are helping companies manage the current economic uncertainty while also helping them prepare for future success. Through a process of regularly evaluating the direct revenues and costs on a per-unit basis, unit economics help companies understand the profitability potential of product lines and adjust accordingly. Without integrated systems, manufacturers struggle to accurately answer these questions and determine how many resource are being allocated to product X versus product Y— visibility gaps that can impact margins.

Using cloud ERP, companies have the visibility they need to know which products are posting positive versus negative margins and make projections around business development and profitability.

Similarly, without a unified system that tracks customer and financial data, businesses can struggle to determine who their most profitable customers are. Customer profitability requires insight into data across areas like average order volume, discounting and customer service requirements, which only a unified ERP system can provide.

Many services-based businesses also struggle to accurately quantify project profitability. An ERP system with a professional services automation component allows a business to allocate staff to projects based on their skill sets and project requirements, minimizing “bench time” for consultants and delivering the greatest profitability.

  1. Helps companies scale and adapt.

Companies that initially rely on QuickBooks, spreadsheets or another basic accounting system generally outgrow those solutions as they scale and add complexity. When these organizations open additional locations, add subsidiaries and/or start handling multiple currencies, the need  for a more robust, enterprise system increases exponentially. Additionally, any attempt to venture into new lines of business, such as services or new products demands the visibility and adaptability that ERP provides.

While smaller firms may be able to run on basic systems and spreadsheets, those that adopt cloud ERP not only improve their existing business management processes, they’re also well positioned to scale up in the future.

Is Your Company Prepared to Navigate the Unknown?

Companies that continue to rely on spreadsheets, poorly-integrated best-of-breed software and/or on-premises ERP to manage their operations face an uphill battle to overcome today’s business challenges.

ERP has come a long way in the nearly three decades since the term was originally coined. Used mostly by large corporations, early systems required significant customization and took years to implement. The cloud has put the power of ERP into the hands of startup, midsized and large companies that need all of the benefits outlined in this white paper

The cloud not only makes ERP more affordable, but also makes the systems easier to implement and manage. Cloud ERP also provides high levels of visibility into processes and performance with anytime, anywhere access to tools and data.

It makes it easier for companies to scale or add functionality as they scale and new business opportunities arise, lowers operating costs, and minimizes the need for upfront capital expenditures and dedicated IT resources.

By making data readily available, automating core processes and ensuring proper controls, ERP solutions allow business leaders to react more quickly to changing conditions. Instead of getting bogged down by manual tasks or a lack of information, they can focus on improving the business, leading to faster, more informed decisions and a more agile organization.

With a cloud ERP solution, both remote and onsite employees have accurate information that enables them to analyze data, spot trends and make better decisions faster. This is critical for identifying new opportunities and getting ahead of the competition. Not only that, but ERP helps eliminate time-consuming, repetitive tasks, dramatically lowers the cost of doing business and allows team members to spend more time on strategic initiatives.

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The 15 Customer Success Metrics That Actually Matter

Eva on September 6, 2022

  • NetSuite

The 15 Customer Success Metrics That Actually Matter

How many tickets are reps closing? How many emails are they sending? How many product demos have they booked? These metrics help managers determine whether a rep was doing their job well or falling short. But what if instead of tracking activity, we measured something totally different?

The old customer success playbook is no longer enough to keep customers happy and coming back. An entirely new school of thought is emerging. It’s one that’s focused less on making the maximum amount of calls or closing as many tickets as possible, and more on developing, maintaining, and strengthening relationships with customers.

And this means measuring success is changing, too. Here are some customer success metrics that will matter more than ever this year — and in years to come.

1. Customer Health Score

This might sound obvious, but hear me out: You’ve got to look at the big picture — beyond just individual tickets and emails. Are customers actually seeing value from your product or service?

How often is your customer using the product? How successful is your customer after they purchase your product? What type of impact does it have on their business? Has their pain point been eliminated?

Customer support is no longer about getting someone to sign on the dotted line, setting up their new service, and answering their emails and calls. Instead, reps need to ensure that their customers are not only surviving but thriving after their purchase. They must follow up with clients, offer assistance with problems, and help them proactively strategize for the future.

As Forrester’s Kate Leggett points out in a blog post, customer success is the driving force behind increasing existing revenue and influencing new sales. One customer’s success can prompt another person to try your product or service in hopes of attaining a similar, successful outcome … but this virtuous cycle only happens when you actively foster and track customer success.

How to Calculate Customer Health Score

To measure customer success, formulate a customer “health” score. What do their finances look like? How many customers do they have? Get a handle on their business’ health as it pertains to your product, then monitor the metric over time.

You can develop a customer health score by compiling all of these factors and using an index as the actual score metric to keep things consistent and easy to track.

You can also measure your customers’ growth. After all, the best sign of business success is growth. Ask if the company is hiring, taking on more business, or improving customer retention rates for a qualitative idea of how successful a customer is becoming.

2. Net Promoter Score

Customer satisfaction is not only about the customer’s feelings towards the support rep, but also about their feelings towards the brand and the product itself. When you measure customer satisfaction, you’re determining how content your customers are when they’re interacting with your business. It should be no surprise that customers who are happier with their experience will be more likely to make repeat purchases.

One of the more popular ways to measure customer satisfaction is through Net Promoter Score. A Net Promoter Score, or NPS®, simply asks whether someone is likely to recommend your company to someone else. The rep and their relationship with the customer play a major role in this rating because they’re probably the person the customer has interacted with most frequently.

The benefit of an NPS is that it provides both quantitative and qualitative data about your customers. Not only does it ask participants to rate their experience on a numeric scale, but it also asks them to provide an explanation for their score. That way, your business can analyze feedback based on the scores, then examine the customer experiences if you come across abnormal or outlying results.

How to Measure Net Promoter Score

Measuring NPS is relatively easy. You just need access to a form tool that can generate a rating scale response.

Your eNPS survey form should only ask one question, “On a scale of 1 to 10, how likely are you to recommend this product or service?” Then, add an open-ended section below it and ask participants to explain their score.

At the end, your form should look something like this.

Two-Step-in-app-NPS-Survey

Image Source

3. Qualitative Customer Feedback

Another important thing to measure is your customers’ feedback. What are they saying about you and the service you provide? What do they like about their connection to the company, and what do they dislike?

Customers need to feel that they have a voice. Offering them a chance to give feedback and provide insights is a great way to build a long-lasting and meaningful relationship.

Customer success managers can determine from qualitative feedback — like a survey responses — how well their reps are working with clients. It might be unpleasant to hear where your onboarding or customer service process is failing, but getting the chance to right a wrong before a customer jumps ship is invaluable.

How to Calculate Qualitative Customer Feedback

The simplest way to collect customer feedback is to send out a survey. Pose a few questions to your customer base and determine how they feel about your customer support reps.

You could also hold a “customer day.” Invite some folks to your office or headquarters for lunch or a meeting, and talk to them one-on-one. Note their facial expressions and body language when they reflect on the service they receive and how they would improve their experience.

Remember: Customer feedback shouldn’t be solely about the product — it should also cover how clients feel about the brand and company, as a whole.

4. Customer Churn Rate

Customer churn is a great metric to measure, especially on a rep-to-rep basis. A customer support rep who maintains a healthy relationship with their clients is likely to have a lower churn or cancellation rate. After all, customer support is about relationships, and building rapport makes a huge difference.

How to Calculate Customer Churn Rate

customer churn rate formula

To calculate churn rate, follow these steps:

Step 1: First, determine the timeframe that you’ll consider when measuring your data. This can be a week, month, quarter, year, etc.

Step 2: Next, determine how many existing customers there were at the start of this time period as well as the number of customers that churned during the same timeframe.

Step 3: Finally, divide the number of churned customers by the total number of existing customers to find your churn rate.

For example, let’s say we wanted to measure the monthly churn rate for my business. At the start of May, I had 1,000 customers, but by the end of the month, 64 customers churned. In this case, my churn rate for May would be 6.4% (64/1000=.064=6.4%).

When measuring churn rate, remember to exclude the new customers that you acquired during the month from your existing total. These customers will count towards your existing customer total during the next assessment that you perform.

Additionally, be sure to include any new customers who did churn during the time period with your overall churn total. Since the churn for these customers occurred during the assessment period, you should include them when measuring for churn rate.

5. Monthly Recurring Revenue

Monthly recurring revenue, or MRR, is a great metric to use to determine how much your customer base — or their spending — have grown since working with your business. This metric outlines the amount of money that your customers are spending on your products and services for each given month. You can compare this value over time to determine whether your customers are succeeding with your products or not. This is particularly helpful for SaaS businesses that operate on a subscription model.

One additional MRR metric that can be calculated is your expansion MRR. Expansion MRR shows you how much additional revenue you’re generating from customers outside of their monthly subscriptions. This can give you a good idea of how effective your upgrades and customer loyalty programs are.

How to Calculate Monthly Recurring Revenuemonthly recurring revenue formula MRR

To calculate monthly recurring revenue, you just need to multiply your total number of monthly active customers by your average revenue per user. This should give you an idea of how much money you’re generating each month.

For example, if I have 1,000 monthly active customers and my average revenue per customer is $750, my monthly recurring revenue would be $750,000 ($1,000 x $750 = $750,000 MRR).

To calculate expansion MRR, you’ll need to add up all revenue that was generated from non-recurring purchases. These would be things like upsells and cross-sells, loyalty programs, and add-on purchases that are made by customers on a one-off basis.

By adding these values together, you see how much your customers are actually spending on your premium offers. If you’re doing well, then you know that customers are not only enjoying your product or service but are thriving because of it.

6. Customer Lifetime Value

Customer lifetime value (CLV) is one of the most fundamental customer success metrics that you can measure for your business. It shows you the total revenue that you can expect a single customer to generate over the course of their relationship with your company.

Businesses can use CLV to determine the value of their customers over time. If their value increases, then your company knows that your products and services are contributing to your customers’ success. If it’s decreasing, then your business may need to re-evaluate its offers and look for flaws in the customer experience.

How to Calculate Customer Lifetime ValueCustomer lifetime value formula (CLV)

CLV takes a customer’s revenue value and compares that number to the customer’s predicted lifespan. It can be calculated in two steps.

Step 1: Multiply your average purchase value by your average purchase frequency rate.

Step 2: Take that value and multiply it by your average customer lifespan. This should leave you with the estimated amount of revenue that one customer will spend on your business.

Let’s say my customers spend an average of $50 every time they shop at my store. My customers also visit my store about 3 times every month. Additionally, my average customer lifespan is typically two years before they stop purchasing from my stores. From this we can determine that my CLV is $3,600 ($50 x 3 visits x 24 months=$3,600).

7. Customer Retention Cost

While it’s great to know that your customers are succeeding with your brand, how can you prove that your customer success efforts are cost-effective? Customer retention cost, or CRC, outlines the total cost of your customer success program and compares it to your total number of customers. This shows you how much money you are spending on each customer to retain them.

CRC helps businesses invest in their customer success programs. While you may be excited to roll out new initiatives, you want to make sure that you’re spending your money in a cost-effective way. By measuring CRC, your business can make smart investment calls by comparing the potential cost of retaining customers versus the potential revenue you’ll generate from a new feature or service.

How to Calculate Customer Retention Costcustomer retention cost formula CRC

To calculate CRC, you’ll need to audit the expenses of all of your customer success efforts. This includes expenses spent on payroll for your customer success and service teams, engagement and adoption programs, professional services and training, and customer marketing.

Once you add all of these expenses up into one sum, you can divide that value by your total number of customers to get your average customer retention cost (sum of all expenses / total number of customers = average customer retention cost).

8. Customer Effort Score

How difficult is it for your customers to get help? As customers ourselves, we understand the frustrations that come with navigating through pre-recorded menu options, repeating ourselves as we’re transferred from agent to agent, and struggling to find a contact option in the first place. In fact, 96% of customers who are faced with these types of high-effort experiences report being disloyal in the future.

So how can you ensure your customer support team isn’t unintentionally creating these barriers that frustrate customers and ultimately make them disloyal to your business? 

You can measure customer effort score (CES) to measure how easy it is for your customers to get the help they want and need. The metric also helps you predict customer loyalty — Gartner found that CES is 40% more effective at predicting customer loyalty than customer satisfaction. 

CES is measured by surveying customers, often once their issue is resolved.  Here’s an example: 

By tracking CES, you can determine where you’re unintentionally making things difficult for your customers and adjust as needed to make it easier for them to get support. As a result, you’ll create delightful customer experiences that increase loyalty.

9. First Contact Resolution Rate

One of the most common customer needs is time. Customers want their problems resolved quickly, so they can get back to pursuing their goals. If they’re constantly waiting for your support team, this adds a great deal of friction to the customer experience.

With this in mind, it’s important to measure your first contact resolution rate. This is the percentage of customer service cases that are resolved within the first interaction. If this number is high, that means your team is not only responding to customers but addressing their needs promptly as well.

How to Measure First Contact Resolution Rate

To calculate first contact resolution rate, you’ll need to divide the number of service tickets that are closed after the first interaction by the total number of service cases your team received.

To do this, you’ll need customer service tools to help you keep track of your incoming cases. For example, a ticketing system can set up digital records of your cases that are easily categorized and stored. And, a help desk can provide the reporting tools you need to calculate first contact resolution rate without having to manually crunch the numbers.

10. Customer Satisfaction Score

Customer satisfaction score, or CSAT, is similar to NPS, but it has one major difference. Instead of asking participants to rate their likelihood of recommending the brand to others, CSAT asks them to simply rate their experience with the company. This gives businesses a snapshot idea of how customers feel after completing an interaction with the support or success team.

How to Measure Customer Satisfaction Scorecustomer satisfaction score formula CSAT

Like NPS, customer satisfaction score requires a survey to measure it. But, you’ll need to trigger this survey after a customer interaction, so you can get the most accurate response from your participant. Remember, this metric should analyze the customer’s immediate reaction to an individual experience, not their overall perception of your brand.

Step 1: Once you have your form set up, you can calculate CSAT by dividing the number of positive scores (scores six to 10) by the total number of scores you captured.

Step 2: Then, if you multiply your result by 100, you’ll have the percentage of customers who are happy with their brand experience.

For example, if we received 50 responses and 40 of them were positive, then our CSAT would be 80% (40/50 = .80 x 100 = 80%).

11. Renewal Rate

If you’re a SaaS business, this may be one of your most important metrics. After all, most SaaS businesses operate on a subscription model, so it’s no wonder that customer success would be determined by the number of people who keep signing up and using your product.

If your renewal rate is high, this means that your team or product is succeeding in driving customer success. So much so, that customers are willing to commit to your business for another year/contract so they can continue gaining benefits from your company.

If your renewal rate is low, this is an excellent indicator that customers aren’t succeeding when using your product. This presents an opportunity for you to invest in customer success programs as well as product development, to create a more delightful, long-term experience for your users.

How to Measure Renewal Raterenewal rate formula

Renewal rate can be calculated like this:

Step 1: Divide the number of customers who renewed their subscription by the number of users who were up for renewal.

Step 2: Multiply your result by 100 to determine your renewal rate.

If you’re not a SaaS company, you can look at product expiration dates. Use your CRM to see when a customer bought a product, then set a reminder to review the customer’s account when their product should be replaced. If they purchased from you again, you know they “renewed” with your business.

Instead of making calls for the sake of making calls, customer support reps are instead turning their attention to relationships and what happens after they make a sale. The metrics that matter have shifted, and the customer success organization is adjusting accordingly. These metrics are worth watching as you help your customer success team ramp up.

SaaS Customer Success Metrics

SaaS customer success metrics are more specific and focus on data that is specific to the software industry. Several of the metrics listed above like renewal rate and MRR do apply to SaaS specifically, but we’ve added a few more that will provide a more holistic view of this business model.

12. Product Usage Rate

The more customers use your product, the more valuable it is to them. That is unless your product is similar to Hinge, where the customer’s goal is to delete the app as quickly as possible.

With just about every SaaS product, your customer service team will be able to track how often each user accesses it. Ideally, you want your overall product usage rate to progress over time until it reaches your ideal usage frequency.

To calculate this metric, decide which intervals you want to measure, i.e. daily, weekly, monthly, etc. Then identify what percentage of your customers are achieving each one.

13. Average Time on Platform/ Average Time in Application

Understanding how much time your customers spend using your software can tell a detailed story about how the product is integrating into their activity. This metric not only helps you understand the customer’s behavior, but it’ll also help you set a benchmark for how long a typical customer should spend using your product. That way, you can make improvements to your software over time.

14. Active Users

If your company is focused on growth, this SaaS customer success metric will be critical to your growth strategy. You can measure active users by adding the number of customers who use the product at a particular frequency — daily, weekly, and monthly are some of the most common.

15. Free Trial Conversion Rate

Freemium options are a staple in the SaaS industry as they drive user adoption quickly, but how can you measure their success? Free trial conversion rate is a must-have measurement for any SaaS company. This metric reveals how well customers are switching from the free version of your product to the version that generates revenue for the business.

You can measure free trial conversion rate by dividing the number of customers using the free trial by the number of customers who converted to a paid subscription. You can measure this data point on a monthly, quarterly, or annual basis.

Success Metrics Dashboard

After deciding which metrics to use as you measure customer success, you’ll need to find a place to track and view all of this data. A customer success metrics dashboard is the ideal solution. There are several types of dashboards available, and we’ve listed a few below, like HubSpot’s Dashboard and Reporting software.

Customer Support Dashboard Example

example of HubSpot's success metrics dashboard showing email sent and customer names

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HubSpot’s Dashboard and Reporting software is both powerful and accessible. Everyone who needs to keep track of customer success, from analysts to senior leaders, can look to this tool as a single source of truth. The best part about this dashboard is you’re not limited to just one instance — create up to 300 of them to give every team a customized peek into the customer experience.

Customer Success KPI Dashboard Example

Example of a customer success metrics dashboard showing total number of support cases and number of escalations

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Keep your customer service and support team on target each quarter with a customer success KPI dashboard like this one. It displays relevant metrics like average response time, first call resolution, and NPS scores. You can even track top-performing reps and celebrate their wins.

Customer Experience Dashboard Example

Example of customer success dashboard showing the number of customer support requests and year to date requests

Image Source

This dashboard example by Tableau presents several metrics at once, like the number of support requests received and how that compares year-over-year. If your team is making decisions about customer success strategy, try a dashboard like this to get a broad overview of your company’s progress.

A Successful Business Depends on Customer Success

Whether you’re in a B2B or B2C industry, customer success is a key determinant of how far your company will go. Revenue and even market share are dependent upon whether or not your customers are satisfied with the value they receive from your products. The only way to know if they are is to measure their success. Use the metrics, dashboards, and tips I’ve shared here to kick your customer success strategy into gear and reach new heights within your business.

Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.

Editor’s note: This post was originally published in January 2020 and has been updated for comprehensiveness.

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80% of Teams Aren’t Meeting Goals. Finance Can Help

Eva on August 31, 2022

  • NetSuite

80% of Teams Aren’t Meeting Goals. Finance Can Help

As finance chiefs deal with this year’s headline issues, from the talent shortage to recession concerns, their role within the organization has broadened. Not only do they need to more carefully manage finances now, but in many cases, they’re tasked with weighing in on other departments’ strategic decisions more than ever before.

Stepping up to this expanded CFO can let you use economic uncertainty to your business’s advantage. To gauge exactly how this should be done, we polled 500 executives and managers at companies with under $250 million in annual revenue, asking them how they perceive business challenges, their leadership’s response to challenges and their company’s prospects in the current economy.

Key Findings From the Survey:

  • 80% of mid-level managers say their teams are struggling to meet goals, and 40% say leadership doesn’t understand how supply and staffing shortages affect their ability to meet goals.
  • 45% of larger organizations and 32% of smaller ones say inflation has positively affected their businesses.
  • Nearly all executives foresee a recession within the next year and half. In response, 51% of finance executives are evaluating the recession sensitivity of products and services. 

CFOs have their work cut out for them: Overall, managers in our survey expressed ambivalence about the support they’re getting from execs to deal with issues like the staffing shortages:

Compounding their lukewarm attitude about exec support, 80% of managers said their teams aren’t able to meet the operational goals they and leadership have set. Reasons for this varied:

  • 23% percent cited outdated tools and processes.  
  • 21% cited the labor shortage.
  • 19% cited materials shortages.
  • 17% said demand is booming beyond their ability to meet it.

As CFO, your team is now tasked with helping to address these barriers. It’s always been finance’s job to vet expenditures; now, the team must lean in and help supply chain and other managers find ways to meet their goals. Other leaders want help from finance in identifying where and how to invest in the business, making it finance’s job to get in and help.

Our survey also polled executives and managers about inflation’s impact on their businesses, their take on recession postulations and their top business concerns.

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Simplify Subscription Management and Improve Customer Service With Automation.

Eva on August 30, 2022

  • NetSuite

Simplify Subscription Management and Improve Customer Service With Automation.

The shift away from transactional sales to subscription services in industries from software to entertainment has accelerated in recent years, with companies of all sizes and in most verticals either transitioning to a subscription model entirely or, at the very least, adding a subscription component to the goods and services they offer. 

The benefits of recurring revenue, like greater financial stability, are well established. However, subscription-based businesses also face challenges that companies with more traditional sales models don’t. A big one: Complex billing that makes automation a must.

Cost, Complexity and Customer Service

Moving from transactional sales to subscriptions changes the billing process. In a traditional sales model, customers may be billed once when goods are shipped or incrementally during a project, but the cycle has a definite end. In a recurring revenue model, customers are billed repeatedly, as often as once per month. This means more work for the accounting team, which has to generate more invoices more often. 

Managing this workload becomes more difficult as the number of subscribers increases, so companies must bring on additional finance headcount to keep pace with growth, resulting in higher operating costs.

Pricing complexity is also a concern for companies that offer subscription services. There are several different approaches — fixed-rate, volume-based and tiered pricing, for instance. Billing may even be based on consumption, like with mobile phone services, or include a combination of fixed and variable charges. Promotional discounts and trial offers introduce more complexity, as billing needs to reflect start and end dates. Keeping track of this information manually is next to impossible, and legacy billing systems aren’t designed to handle all of these variables. This can lead to billing errors and delays that frustrate customers and hurt cash flow.

To succeed with a subscription-based business model, companies must not only win new customers, they must also retain them month after month, year after year. This requires excellent service. In addition to answering basic questions, the customer service team is often tasked with managing subscriber-initiated change requests, such as adding new users to an account or temporarily suspending service. 

That high-touch approach helps build strong relationships, but it requires sufficient headcount to ensure a timely response to customer inquiries. This too increases operating costs, particularly in a tight labor market where hourly rates continue to rise. 

And because turnover is notoriously high in call centers, training costs are a concern.

Automated Billing and Subscriber Self-Service

Clearly, the subscription business model increases billing volume and pricing complexity. Rather than continually hire more accounting people in , companies should consider automating subscription management. Automation simplifies the billing process and, with the right system, puts subscription and billing data in one place, improving data quality and helping ensure invoice accuracy. 

That’s important because subscription plans that combine flat monthly rates with variable charges or one-time fees can create billing nightmares — and a negative, frustrating customer experience. An effective billing management solution should support a range of pricing options, including fixed and consumption-based rates, with the ability to customize plans for individual subscribers.

Companies can also improve the customer experience by giving subscribers a self-service option as well as telephone and/or email support. A cloud-based customer service portal improves subscriber engagement by providing greater insight into account details, such as list of service components, costs and number of users assigned to an account. Allowing customers to modify their details, like changing billing information, increasing or decreasing service components and adding or removing users, both delivers greater flexibility and reduces customer service workloads.

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How Multidimensional Financial Analysis Creates a Data-Driven Culture

Eva on August 24, 2022

  • NetSuite

How Multidimensional Financial Analysis Creates a Data-Driven Culture

Business insights can change how you operate, to hit financial goals and support strategy. They can also broaden your view of what to create, for greater value to the customer. That’s why business intelligence solutions that deliver real-time, contextual analytics are so essential for today’s evolving CFO role, as it expands beyond financial figures to answer questions like:

  • Where can we cut supplier expenses without impacting product performance?
  • How much more revenue will we gain from this new channel?
  • How much is this product driving customer expansion?

Multidimensional analysis and reporting enable informed and decisive leadership, with 360° visibility and actionable insights into business financial and operations activity. It adds clarity and broad context, so leaders can intelligently navigate the business towards the future.

Financial Figures Reveal Only Part of the Business Story

Financial statements are valued by investors and creditors, to understand how well management can generate profit and optimize cash. Statements help them assess the potential risk or opportunity. But statement guidance for internal stakeholders is less insightful. Financial figures don’t give line leaders important feedback into how well operations performed or the likelihood of hitting next period’s targets. Similarly, financial statements don’t provide proof to the CFO and the executive team of how well operations can support strategy and deliver value to the customer.

Rich Insights into business performance reside deep in the data. The challenge is unlocking it. 

Multidimensional Analysis Answers the “How and Why”

Multidimensional analysis is a means to measure and analyze a business in the same fashion in which it grows and operates: multidimensionally. It yields business visibility from all angles — deep into a business unit or a specific transaction and through a process like order-to-cash or across the entire value chain. It enables visibility by time, past versus present and by external influences like customers, suppliers, partners and market. Slicing and dicing of data leads you on a path of real-time data discovery to answer a specific question, uncover the unknown, guide decisions and formulate strategy. 

Technology is key to converting business data and aggregate financials into actionable insights. It starts with a solution like an ERP that consolidates financials with operations data, to centrally manage accounting, sales, CRM, inventory, ecommerce and more, from one system. This ensures transactions are recorded as they occur, and automatically ripple throughout the system for real-time views and reporting by all affected units. OLAP, or online analytical processing, makes data more manageable and accessible, for quick and efficient analysis and reporting. 

Applying dimensions, or segments, to the chart of accounts is another way to enhance understanding of day-to-day activity while streamlining the general ledger. “Dimensions” are tags used to group or filter data by organization details — location, subsidiary, division — or by revenue drivers — customer, product, channel. More dimensions translate into deeper discovery and insights. 

With multidimensional reporting, you can link a transaction record to aggregate total as well analyze the process between the endpoints. In other words, you can centrally view and manage both performance outcomes and processes. 

The Business Application is Unlimited

Multidimensional analysis provides rich contextual insights to answer questions like:

Explain a financial statement figure: Why is COGS trending high?

Quantify a revenue driver: How much is our loyal customer buying the new product?

Eliminate inefficiency: Where can we streamline order-to-cash?

Look for cost savings: Should we relocate to where labor costs are more affordable?

Track a breakdown in execution: Why is sales not performing to plan?

Explore an opportunity: How much revenue might we gain from a new partnership?

Learn from success: Why is this subsidiary consistently more profitable than the rest?

Plan for innovation: How do we create differentiated value for the customer? 

Insights can lead to definitive answers. It can surface new questions, which may lead you down a new path. That’s the value of multidimensional analysis: It can lead you where you need to view, if you ask the right question and are open to the unexpected. 

Decision-making is Faster and Smarter

While perfect knowledge is unattainable, real-time contextual insights can provide the clarity and confidence for leaders to make data-supported decisions when it matters — to leverage an opportunity, avoid a risk or prepare for what’s next. No need to wait on the financial close cycle, or for an analyst to download, merge and calculate data from different sources. Ad hoc reporting, by analysts and decision-makers, provides the agility to pivot in dynamic markets. 

One integrated platform view with multidimensional analysis helps answer the “how and why,” so leaders can intelligently navigate the business towards the future. 

It Promotes a Data Culture

Multidimensional reporting can render value for every role, where data is part of every decision and process. An AR analyst could analyze and report on key customer payment activity, to identify and address a potential risk. A purchasing manager could discover which suppliers are more reliable and when it’s advantageous to switch orders for high-priority or rush orders. 

Every business unit can be transformed by the guidance, continuous measurement and accountability that comes from multidimensional analysis and reporting. 

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