By Mike Hart
For most small manufacturing businesses, meaning companies that broadly speaking have fewer than 75 employees, an ERP system is not practical because of cost and complexity considerations. For most, the only feasible alternative is a small business manufacturing software package.
Small business manufacturing software packages fall into two categories: small business manufacturing systems that include accounting, or “hybrid” systems that link to an outside accounting system. In this article, we examine whether a hybrid system is a good solution.
How many small business software packages are there? On my blog I’ve compiled a Manufacturing Software Directory that currently lists seven small business manufacturing systems with accounting and 11 hybrid systems that do not include accounting. In the case of hybrid systems, I list the accounting packages to which they can be linked.
Why is there roughly double the number of hybrid systems versus systems with integrated accounting? I offer two reasons. First, from a development and investment standpoint on behalf of the software maker, it is easier to link to another accounting system than it is to develop your own suite of integrated accounting modules. Second, linking to a popular accounting package such as QuickBooks has marketing value because it appeals to companies that want to continue using their existing accounting system.
A hybrid system sounds good on paper. It offers the promise of a “best of breed” solution where the manufacturing software does what it does best and the accounting software does what it does best. This would be true if it were possible to have a clean separation between the two systems, but in reality there is a number of overlapping functions that can cause problems.
Hybrid systems use either a “hard” link or “soft” link to the outside accounting system. A hard link is when transactions are posted to the accounting system’s database in real time. A soft link is when data are exported to the accounting system in a batch process.
A potential problem with a hard link is version control. With a hybrid system you must coordinate and apply updates to two systems instead of one, which means that each version must remain compatible with the other.
Maintaining version compatibility may force you to purchase updates. For example, a few years ago I heard from other software developers that QuickBooks changed its database architecture and required that all participants in their software development kit program upgrade and standardize on their new version. This not only caused grief for the developers, who had to immediately retool all their QuickBooks processes, it also forced all users to upgrade to the latest version of QuickBooks.
Also keep in mind that with a hard link you are synchronizing data between two separate databases at the same time. Usually the accounting system must be running before you can launch the manufacturing system to connect to it. Users will log into two systems and most likely will have two sets of user IDs and passwords. Backups must be performed on two databases and should you ever need to restore data, you must restore both databases in perfect coordination or you will have big problems.
My company’s software package, DBA Manufacturing, includes integrated accounting, but we also offer a financial transfer capability for companies that want to use an outside system for financial applications. We, as well as some other systems, use a “soft” link where data are exported in a batch process to the outside system. With a soft link you keep the systems totally separate, which mitigates issues of version control and database synchronization.
In terms of total software cost, hybrid systems can be significantly more expensive than integrated systems because you often must purchase the accounting software as well. Even if you are already using the accounting software, you may have to upgrade to the latest version for compatibility purposes.
In the case of QuickBooks, some hybrid systems require you to use the QuickBooks Enterprise edition, which is several times higher in price than the QuickBooks Pro or Premier versions. So when it comes to cost, take into account that you are buying and maintaining two systems, not one.
Hybrid manufacturing systems use two design approaches. One is to limit the accounting system to financial applications only and the other is to use the accounting system for operational applications such as sales orders and purchasing.
With DBA Manufacturing we found it impossible to use an outside system for sales and purchase orders. There are simply too many vital integration points involved, including line item required dates and due dates, job and subcontract service links, and inventory updating. These integration points do not exist within QuickBooks sales and purchase orders and are unlikely to exist in other accounting systems either.
So if a hybrid system uses the accounting system for sales or purchase orders, there is a high probability that some design compromises have been made on the manufacturing side to work around the limitations of these accounting system modules.
Some hybrid systems provide two inventories: a manufacturing inventory and a sales inventory. This may sound logical on paper, but is a bad idea. There is always overlap between the two inventories and you are constantly checking and transferring items from one inventory to the other.
A major reason companies are attracted to hybrid systems is that it enables them to keep their existing accounting system. Is this a desirable objective?
If the motivation is to make the conversion process easier, not much is actually gained. If the manufacturing system uses its own sales and purchase orders, you will have to import or enter almost all your master tables anyway, including customers, suppliers, items, prices, tax codes, etc., and you must enter open sales orders and purchase orders. It is true that you don’t have to enter open AR and AP aging amounts and beginning GL account balances, but these are easily entered in a new system and are not a significant savings in time or effort.
You can also be assured that your chart of accounts is not organized for a manufacturing company. On the other hand, if you use an accounting system designed for manufacturing, the chart of accounts will be structured properly for analysis of key metrics such as inventory, WIP, direct labor, and factory overhead.
Of the 11 hybrid systems listed in the Manufacturing Software Directory , nine of them link directly or indirectly to QuickBooks and four link to Peachtree. This is understandable because QuickBooks and Peachtree are the number one and number two low end accounting systems in the market.
Are QuickBooks and Peachtree good accounting solutions? They are low end accounting solutions that can do a good job in collecting money, paying bills, and producing financial statements. But so do most accounting systems. As far as adding any value for a manufacturing company, QuickBooks and Peachtree offer nothing of significance.
I think companies make a big mistake when they insist on keeping their accounting system as a prerequisite for manufacturing software selection. In doing so, they limit their choices to hybrid systems with all the potential problems listed in this article.
If you need specific manufacturing features that are only available in a particular hybrid product, than it makes sense to select that hybrid product. But if you have a choice between two equivalent manufacturing systems where one has integrated accounting and one links to an outside accounting system, the integrated system is the better choice on many levels.
From experience with my own product and conversations with colleagues in the industry, companies are generally not happy with hybrid solutions. The QuickBooks die-hards want to use QuickBooks for most applications and are disappointed when QuickBooks gets relegated to financials only. Manufacturing systems that use QuickBooks for operational applications such as sales and purchase orders limited in their capabilities.
My advice? When in doubt, avoid hybrid solutions and go with an integrated small business manufacturing system.
Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.