A 5-Step Capital Budgeting Process for Your ERP Purchase

Your Enterprise Resource Planning (ERP) solution will integrate, manage, facilitate, and automate all your business processes. A thorough capital budgeting process will enable you to invest wisely in a system that completely matches your business needs. So, share this five-step capital budgeting process with your team.

1. Business process review: Conduct a review of your current business processes to determine your requirements for the new ERP system. Assemble a team of executives representing each department or function to share their business-critical needs and workflows. Your system requirements and corresponding budget requirements will ultimately depend upon the following considerations:

• Business functions and processes to improve or automate
• Process and data entry redundancies to reduce or eliminate
• Communications between departments to improve
• Business objectives
• Which departments will use the system and how
• Whether your IT personnel will maintain an on-premise solution or your solution will be hosted in the cloud/SaaS

2. Estimation of costs: The next step is to determine the incremental and total costs required to meet the needs uncovered in step 1. This is one of the most intensive steps because it requires internal and external research. Internal research includes talking with IT staff about existing hardware, software, and personnel resources. External research includes costing with vendors in the consideration set.

The estimation step should ideally begin with a prioritization of the considerations in step 1. Consider the investments required and financing costs, if applicable, to determine actual investment costs. Break the costs down as follows:

Technical costs:

• Hardware

• Installation and configuring of hardware and software

• Software licensing and hosting

• Operating system

• Customizations, if not an industry-specific solution

• System testing prior to go-live

• System validation, if required in your industry

• Network and technical communications

• Maintenance and support

• Cybersecurity

Software is typically customized by modules and features. You will likely choose modules to fit your business, including accounting/financial management, product planning and development, sales and marketing, CRM, HR management, purchasing, SCM, manufacturing/engineering/production, and inventory management.

Here are the data and associated labor costs to factor into your budget:

Data costs:

• Data extraction from legacy (current) system

• Data accuracy tests and scrubbing

• Data migration to the new system

Human resource costs including man-hours:

• Support from vendor personnel

• Internal support personnel (for on-premise solutions)

• Change management

• Project management

• Process redesign management

• Employee training

• Opportunity costs for re-appropriating employees

Making an upgrade to a new ERP solution will require a redesign of existing inefficient processes. Once this is complete, employees will require training and a ramp-up period before go-live in order to become familiar and proficient with their new system and software packages. They will need to be taught how to use the programs and whom to rely upon for technical questions and assistance. For this reason, strongly consider vendor support when choosing your ERP solution.

3. Estimation of cash flow, cost, savings, and ROI: Project the resulting financial benefits the business will be expected to generate and accrue over time with the new ERP solution in place. In terms of return on investment, assign cash flow and/or cost savings values over time to the items in step 1. Strongly consider labor cost reductions, improved cash-to-order cycles, and new efficiencies in supply chain and inventory management.

4. Assess risk: Itemize the associated risks of the project, and evaluate each item against its estimated cash flow or cost savings benefit to determine if the benefits outweigh the risks. In instances when the risks may outweigh the benefits, consider eliminating the associated features from your costs. For example, you may decide that on-premise servers present the risks of cybercrime and data security breaches and opt instead for a cloud-based solution.

5. Implement: The finalized implementation plan includes a timeline with key project milestones leading up to the go-live date, how the project will be paid for, a method for tracking costs, and a procedure for recording cash flows and cost savings.

There are several ways to finance the purchase of an ERP and management will need to determine whether the capital expenditure should come directly from company funds, or if it should be financed. Grants may be available to help with financing. If you’d like to learn more about the steps in this process, download our full Plan and Build Your ERP Budget eBook and contact your ECI support team today!