Discounted Cash Flow Method In ERP Projects

Discounted cash flow method in ERP calculations

In the past, we covered ERP justification. Many clients neglect it. Yet, it’s a crucial milestone for any ERP project. But, what does that have to do with the discounted cash flow method in ERP?

Also known as DCF, it’s one of the most famous assessment approaches. It allows you to compare investments based on future returns. Naturally, it sounds like an outstanding selection tool.

Or does it?

What is the discounted cash flow method in ERP?

As usual, Investopedia has a simple definition. DCF valuates investments based on their probable impact on cash flow. In other words, it lets you assess investments using their expected financial impact.

Why is it attractive?

Firstly, we must understand that time value is critical. Current money is more valuable than future cash flows. That’s because you can count on what you currently own. Thus, DCF lets you compare probable benefits with current capital.

What are its disadvantages?

Theoretically, DCF depends on assumptions. Typically, future cash flows depend on countless variables. You must think of inflation, market shifts, old and new trends, and more. Fundamentally, DCF leaves lots of room for error.

Using discounted cash flow in ERP selection

Moreover, things get worse when we move into ERP selection. This study has great insight into the issue. Basically, the values often result in result inaccuracy when applied in real life.

That’s especially true when we consider ERP’s nature.

The problem with traditional DCF

Unfortunately, ERP software does more than influence cash flow. Often, future cash flow is negligible compared with its impact. Technology investments mainly provide strategic benefits. As such, direct returns aren’t their main focus.

What’s the best alternative to the discounted cash flow method in ERP?

ERP software has countless benefits:

  • Operational efficiency.
  • Product quality improvements.
  • Easier financial management.
  • Database centralization.

Those are only basic benefits. As you can see, most don’t generate direct revenue. ERP implementation isn’t investing in stocks. You must assess your company’s processes. Then, think of what streamlining them can do for you.

Sure, it’s more complicated than following a formula. Thankfully, we’re here to help. We’re offering a free consultation for free clients. To gain that competitive edge, click here!

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Zero Point ERP Solutions

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