As a result, many growing service companies can’t track their cost by project and may be undercharging, and product companies may put too much muscle behind their least profitable products. And companies that want to shift to a subscription model find that calculating deferred revenue is a messy, manual process.
“QuickBooks is a logical step up for businesses once they’ve outgrown managing their accounting on spreadsheets, but when you get to the point where you have at least a million dollars in sales and have put in a range of systems to handle various parts of your business, you should be looking at moving your company to an ERP system,” says Barry Moltz, a serial entrepreneur, angel investor, and consultant specializing in small businesses.
Moving to an ERP system can lower operating costs by automating key processes (and saying goodbye to time-consuming and error-prone spreadsheets), providing granular insight into business operations, and offering greater flexibility for new business models and market opportunities.
If you lead a small business that uses QuickBooks, we at Oracle NetSuite think you should consider these four ideas:
1. Understanding profit and loss is not enough.
Small business leaders keep an eagle eye on the profit and loss statement to monitor their company’s financial health, but P&Ls can mask problems that are hurting the bottom line and dragging the business in the wrong strategic direction. For starters, cash—not profit—is king.
“Many small businesses look at the P&L but never at cash flow—and especially during difficult times like today, profit is not as important as cash flow to a small company,” Moltz says. While simple accounting software systems like QuickBooks do have cash flow statement capabilities, many companies don’t understand how to use that function or how to read the statement, he says.
NetSuite offers insight that QuickBooks Online can’t, including real-time reports on revenue forecasting as well as drill-down and drill-across reporting for any record in the system. Having the flexibility to view integrated financial and operational data by department, location, product line, and a range of other perspectives helps small business leaders find opportunities to improve cash flow and identify problems that might be hidden in a pure bottom-line profit view.
2. Inventory management is critical to cash flow.
With QuickBooks Online, businesses have to use third-party applications and Excel spreadsheets to manage critical inventory activities like bills of material—all the parts, assemblies, and materials it takes to make your products.
“Inventory is key to a company’s cash flow, and you have to understand how much inventory is turning,” Moltz says. “Whatever product a business has sitting in inventory is money they can't use in other parts of the company.”
Having an inventory management system that is fully integrated with other key functions like order management, CRM, billing, procurement, warehouse management, logistics, and finance gives businesses a real-time view so they can make more informed decisions.
3. Calculating deferred revenue manually creates a big disadvantage.
For services companies that take payment up front and software companies that need to keep pace with changing licensing and distribution models and multi-element contracts, automating revenue recognition makes compliance with regulations and accounting rules easier. It gives business owners greater confidence in their financial position and forecasts at any moment in time. More basic accounting software requires manual calculations of deferred revenue.
Another disadvantage of calculating deferred revenue manually: It makes selling a business a bit more challenging.
“A client of mine sold his business for more than $100 million,” Moltz says. “He was paid in advance for a lot of stuff, but he was using a basic accounting platform (not QuickBooks), so they accrued it manually on Excel, and it was a mess. That was a little bit of a downer for the company when they were selling because it wasn't a system that a buyer could trust.”
With QuickBooks Online, recognizing and deferring revenue at various points in time require manual workarounds that can complicate accounting and limit future visibility. With NetSuite ERP, accounting teams can schedule revenue recognition automatically and provide accurate financial statements and forecasts in real time.
4. Limited systems limit opportunities.
When running a small business, it’s hard to step back and get a clear look at how everything is running. Here’s one potential warning sign of underlying problems: a preponderance of spreadsheets.
Too many spreadsheets could signal that people don’t have easy access to the information and insights they need to do their jobs. Without access to accurate, real-time information that connects the dots across the company—from finance to supply chain to sales and order management to fulfillment—company leaders can’t ask the right questions, Moltz says.
“A lot of small business owners don't understand that in the long run, the investment in an ERP system is worth it,” he says. Moltz gets that it’s a big financial step for leaders of even fast-growing, now-prospering businesses to move from accounting software that they might’ve used since those fledgling startup days. “But it’s important to understand the value to the business; you can install one system and be done for the rest of your business career rather than continuing to add point products and not getting the insight that you really need.”