How should balance sheet be affected by this project?

ERP CHANGE MANAGEMENT

If you are new with this web log we request you to read preface first.

This part is about the messages on how balance sheet will be affected by ERP project. As we have mentioned before you have to disseminate the messages to all of the related people.

A_1-6 what is the timetable to implement ERP?

Project scheduling and selected systems for implementation should be announced to departments.

A_1-7 how should balance sheet be affected by this project?

Benefits from improved business processes and improved information provided by an ERP system can directly affect the balance sheet of a company. You have to show affect of the project in the balance sheet and show the decision-makers how this project could be valuable for the company. So you should prepare your company balance sheet as shown in the following example and use it properly in your meetings, communications etc.

(We have used following example with the permission of Dr. Scott Hamilton)

To illustrate this impact, a simplified balance sheet is shown in figure 1-7-1 for a typical manufacturer with annual revenue of $10 million. The biggest impacts will be on inventory and accounts receivable.

In the example, the company has $3 million in inventory and $2 million in outstanding accounts receivable. Based on prior research concerning industry averages for improvements, implementation of an ERP system can lead to a 20 percent inventory reduction and an 18 percent receivables reduction.

Figure A_1-7-1 Summarized balance sheet for a typical $10 million firm

	Typical
	Current	Improvement	Benefit
Current assets
Cash and other	500,000
Accounts receivable	2,000,000	18%	356,200
Inventory	3,000,000	20%	600,000
Fixed assets	3,000,000
Total assets	$8,500,000		$956,200
Current liabilities	xxx,xxx
Non current liabilities	xxx,xxx
Stockholder's equity	xxx,xxx
Total liabilities and equity	xxx,xxx

Inventory Reduction. A 20 percent inventory reduction results in $600,000 less inventory. Improved purchasing practices (that result in reduced material costs) could lower this number even more.

Accounts Receivable. Current accounts receivable represent seventy-three days of outstanding receivables. An 18 percent reduction (to sixty days' receivables) results in $356,200 of additional cash available for other uses.

ERP Benefits on the Income Statement

A simplified, summary income statement for the same $10 million manufacturer is shown in figure 1-7-2. For many manufacturers, the cost of sales ranges from 65 to 75 percent of sales (the example will use 75 percent). Using industry averages for each major benefit, the improved business processes and associated information system almost double the current pretax income.

Inventory Reduction. A 20 percent reduction in the current inventory of $3 million results in ongoing benefits of lower inventory carrying charges. Using a carrying cost of 25 percent results in $150,000 in lower carrying charges each year, identified here as part of the administrative expenses.

Material Cost Reductions. A 5 percent reduction in material costs because of improved purchasing practices results in annual savings of $225,000.

Labor Cost Reductions. A 10 percent reduction in labor costs because of less overtime and improved productivity results in annual savings of $100,000.

Increased Sales. Improvements in customer service typically lead to a 10 percent sales increase; this is not shown in figure 3.1.

Annual benefits totaling $475,000 in this example almost equals the current pretax income of $500,000.

Figure 1-7-2 Summarized income statement for a typical $10 million firm

	Typical
	Current	Improvement	Benefit
Sales	$10,000,000	10%
Cost of sales	7,500,000
Material 4,500,000 60% Labor 1,000,000 13% Overhead 2,000,000 27%		5%	$225,000
		10%	$100,000
Administrative expenses	2,000,000		$150,000
Pretax income	$ 500,000		$475,000

This part will be continued in next post.