Benefits from improved business processes and improved information provided by an ERP system can directly affect the balance sheet of a manufacturer. To illustrate this impact, a simplified balance sheet is shown in figure 3.1 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 3.1 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.
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 3.1 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.
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