Implementing Financial Discipline with ERP | ERP Finance

Implement Financial Discipline with ERP

Implementing Financial Discipline with ERP | ERP Finance

Cash flow is considered to be the lifeblood of a business. Steady cash flow and healthy working capital are essential for manufacturing SMEs, not only to survive but also grow their business. Organizations must manage finances effectively in order to achieve this. Implementing financial discipline, right from the beginning, is crucial to ensure sound financial management within an organization. Let us now understand, what exactly is Financial Discipline? and How manufacturing SMEs can implement Financial Discipline with ERP Software.

What is Financial Discipline?

The word financial discipline is made of two parts. Financial + Discipline.  Financial refers to how an organization manages its finances. Striking a good balance between the inflow and outflow of finances is very important to ensure the organization’s success. Discipline is the practice of training people to obey a system of rules or a code of conduct.

Thus, Financial Discipline involves clearly defining a set of rules, systems, policies or procedures relating to every financial aspect of the organization and ensuring that these rules are followed by everyone in the company.

The senior management should motivate and encourage all employees to adhere to the financial disciplines laid down by the organization. They should also carry out frequent & regular checks to make sure financial discipline is being maintained. Eventually, financial discipline should become a culture of the organization

Examples of creating rules for implementing Financial Discipline in an Organization

Given below are some examples of how companies can create rules for maintaining Financial Discipline.

  • Companies must clearly classify where they will spend their finances and allocate stringent budgets for each function, and department. This will help control the spending, as well as spend the amounts only for the budgets and heads allocated.
  • Companies can state that all incoming amounts due from customers / third parties should be received on or before a certain date.
  • The payments due to vendors/suppliers/government should be made 2 days before the due date.
  • The inventory should not exceed XX quantity or value of the inventory should not exceed XX amount etc.

Setting up such rules, regulations will enable an organization to closely watch their income and expenses. It will also ensure that there are no unplanned expenses and therefore ensure positive cash flow.

Now that we have seen some examples, it is also important to mention how implementing an ERP Software or ERP Finance & Accounting Module will make it easier to roll out such financial discipline policies and monitor how meticulously these are being followed. Let us first understand the components of an ERP Finance module and then how to implement Financial Discipline with ERP.

Components & Functions of the ERP Finance & Accounting Module

ERP Finance & Accounting is a module of ERP software that consolidates the manufacturing organizations’ financial data from multiple locations, companies, branches, departments into a single comprehensive view.

ERP Finance Module has components such as Account Administration, Account Payable and Receivables, Cash and Bank Accounting, Fixed Asset Management, Costing, Statutory Compliances, Expense Management, Financial Analysis

ERP Finance Module helps keep a close watch on the financial status with detailed analysis reports such as ledgers, trial balance, balance sheets, quarterly statements, etc.

How to use ERP Software to implement Financial Discipline in a manufacturing SME?

As ERP consolidates all the financial data and provides complete visibility into each department, operation, function of the company you can perform a lot of activities such as budget controls, payables & receivables management, credit controls, inventory controls, expense analysis, and so on.

1. Implementing Budgets & Control  

With ERP you can set up specific budgets for each department, unit, cost centers, based on your business objectives. With ERP you can enforce restrictions on expenses and set up policies for approval or rejection of expenses. You can implement expense approval workflow and set up SMS, Email alerts. All these strict measures will ensure your expenses do not go overboard. ERP provides budget variance reports to track actual v/s budgeted spend and perform analysis.

2. Payable & Receivable Management

ERP offers an easy and effective way to manage the accounts payable and accounts receivable of an organization. ERP helps implement the “Dunning process” to send automated and frequent reminders to customers for payments due. ERP keeps a track of due dates associated with payments, monitors if the payments are received or not and sends Email / SMS reminders for payments. This helps faster processing of amounts receivable and reduces the risk of bad debts.

The accounts payable module ensures that the company can effectively manage the vendor liabilities. It sets up notifications and alerts to make sure payments are done on time to avoid any penalties, surcharge, etc.

3. Credit Controls

Obtaining customer orders are important and most organizations provide a certain amount of credit to their customers. However, defining proper credit terms is crucial. The credit-control policy of an organization defines how much credit to extend and to whom for how many days.

With the help of ERP, you can define the credit value of each customer and also specify maximum credit days for each customer. Based on the credit-control policy, ERP automatically sends reminders, notifications, and alerts to ensure payments are received on time. Also, ERP provides warning messages to end ERP users that credit limit has been reached and if required, further transactions can be restricted. This helps to minimize the risk associated with extending credit.  Read more about credit control policy here.

4. Inventory Control

Manufacturing companies must ensure optimum inventory levels to ensure continuous production. They must avoid situations of stock-outs or overstocking.

With ERP, manufacturing companies can predict inventory requirements by using Material Requirement Planning methods. A centralized system makes it possible to track inventory across multiple locations. Real-time, accurate knowledge of inventory & items in stock enables you to define reorder points & create notifications, alerts whenever inventory falls below certain levels. Thus companies can ensure optimum inventory and avoid overstocking. This also ensures a healthy working capital.

5. Purchase Practices or Procurement Function

The procurement function has to ensure that all goods, materials, services are procured at optimal times and best prices. In order to achieve this objective, it is important to have a company-wide procurement policy in place as well as a good supplier base to be able to have an upper hand in the negotiations for buying at most competitive prices.

An ERP with an integral e-Procurement solution will help streamline and automate business functions such as vendor registration, demand aggregation, sending the request for quotations, inviting quotations or conducting reverse auctions, generating comparative statements to identify vendors providing lowest landed rates and awarding contracts.

This will ensure a significant reduction in procurement costs as well as soft savings resulting from rate contracts, price protection, negotiation after initial quotes, and so on.

6. Review Costs

ERP provides real-time, in-depth reports for various costs incurred by the company such as cost of production, cost of overheads, departmental expenses. All these help to analyze trends and patterns of expenses as well as review the reasons and make informed decisions to take corrective measures (if required)

7. Financial KPIs

Financial KPIs are helpful in determining how well a company is performing in terms of generating revenues and controlling expenses. ERP provides classic reports – such as cash flow, fund flow, unit economics, manufacturing cost, per employee earnings ratio, profitability, revenues, sales figures, periodic comparisons time over time. By keeping a track of the right metrics, you will have good insights into your organization’s financial health.

What is the importance of Financial Discipline?

When a company implements Financial Discipline it will be able to:

  • Implement stringent budgets & control on spending
  • Avoid unnecessary or unplanned expenses
  • Ensure positive cash flow
  • Achieve optimum inventory
  • Ensure Healthy working capital


ERP is extremely helpful to implement Financial Discipline for Manufacturing SMEs. You can create effective policies & procedures and implement them through ERP for good financial management to improve your cash-flow and profitability.

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