📬 Old vs. New: When To Change Your ERP...

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There are some awesome questions coming through, but I’m always looking for more. Submit your questions here, and I’ll do my best to get to them in the coming weeks.

We’ve got some great topics today. Here’s what’s on tap:

Now, let’s get into it.

Wheeler Dealer from Saskatoon, Canada asked:

Floorplan financing is a common financial tool used in dealership businesses (Auto, Recreational, Equipment/Machinery), providing favorable/extended terms for the dealership. When it comes to M&A in this space, is floorplan financing of new inventory considered (a) working capital, (b) debt, or (c) it depends?

Hello Wheeler Dealer.

This is an interesting question, and is quite specific to your sector.

I’m not from the auto world, so I called my pal Car Dealership Guy to help on this one.

He filled me in:

“Think of a floorplan facility like a revolving credit line secured against vehicles. It’s there to finance new inventory and absorb the ebbs and flows of working capital swings. It’s particularly important in the case of car dealerships because the value of the dealership is so dominated by the inventory.

In smaller dealership M&A, it’s rare that floorplan financing travels with the business in a deal. They are typically locked up with personal guarantees, so the change of control clauses would get triggered.

So typically, the business would get valued on a cash-free, debt-free basis. And the inventory gets marked to market value on closing day. The inventory will be funded by a new floorplan facility the buyer would be responsible for.

The rules are different, though, on a bigger deal if you are working with bigger banks (minus the PGs.)”

So, assuming you aren’t taking on the sellers’ floorplan facility yourself, the answer here is you need to think of it as debt, and debt that stays with the seller. So, to come back to your question, the existing facility kind of becomes irrelevant in the valuation math. It’s excluded.

But, if you are working on a deal where you are taking on the seller’s existing facility, and the debt will survive the change of control provisions in the loan docs, then that’s different. You will need a mechanic to deduct the transferring debt from the purchase price and purchase price adjustment to make sure that the debt gets marked to the value at closing.

Thanks for opening my eyes to an interesting industry-specific question. And a special thanks to Yossi Levi, aka Car Dealership Guy, for helping me out on this one.

Tomlette from Washington, DC asked:

I just finished reading the Outsiders book you had recommended in a prior mailbag, and I gleaned a lot from learning about divergent paths to success. The common theme that stood out the most to me focused on how these outsider CEOs often took an aggressive approach to decentralized operational control but centralized capital allocation and strategic direction.

I work in an organization with a deep-rooted culture of BU individuality, which has historically not dictated capital investment across the group without first socializing any investment with the BU CEO/CFO for agreement. Accordingly, I frequently encounter difficulty encouraging our BUs to work together across the group, as there is not often a one-size-fits-all strategy/solution to the degree that the BUs could get on their own.

As our industry (healthcare) begins to navigate legislative changes that will further challenge thin margins, I see a centralized capital allocation strategy only getting more important. Can you offer your perspective on how much/little to force centralization of this at the top level, while paying respect to the culture of individuality?

I’m glad you enjoyed the book, Tomlette.

There are a few big themes in The Outsiders, and you’ve nailed one of the most important. Push operations down. Pull capital allocation up.

It’s controversial because most conventional management theory drives in the opposite direction. Centralize operations in the name of ‘synergies’, decentralize capital allocation by stealth through delegated decision-making.

Which is exactly the reverse of what Thorndike’s CEOs did.

I’m firmly in camp Outsiders.

Operations need to live where the operation is. You can’t drive a car from the back seat, or fly a plane from the ground. We’ve all had the experience of some well-meaning dork from head office dropping in a process that looks smart in PowerPoint but makes no sense at the coal face.

I’ve also been that dork. So I know both sides of it.

Improving product and service doesn’t happen while sitting behind a Tableau dashboard.

If you are fixing customer service in Starbucks, it happens one cup of coffee at a time. Product, service, experience. Most of that work happens in-store.

The role of the center is to spot patterns: training issues, equipment failures, product opportunities, and use them to serve the stores at scale. Not the other way around. I think of all operations management through that lens.

Capital allocation, on the other hand, is about trade-offs. Any good business has 10, 20, 50 ideas for every dollar of capital. Someone has to decide what makes the cut.

That decision can’t sit locally because a BU will always optimize for itself, not the group. Capital allocation is the job of the CEO and CFO. That’s what being a steward of the enterprise actually means.

I wrote about an example where this went wrong here.

At the end of the day, you only have so many (gr)eggs in the basket. And as the saying goes, you can’t make a Tomlette without breaking some Greggs.

JP from Chicago, USA asked:

Secret CFO, I am 3 months into a director of finance role, and the executive team and the existing finance team know we need to either upgrade our ERP (basic NetSuite) or move due to growth domestically and internationally.

I’ve read and loved your articles on avoiding the pitfalls of an implementation, but after going through the demo circus of NetSuite OneWorld, Sage Intact, SAP, Workday, and Campfire, I’m struggling with one thing in particular. How do you approach discounting (up counting?) the rate of innovation of the up-and-comers that are wrapping their system around AI (Campfire/Rillet) vs. the old school that are trying to layer it on top?

It feels like we are at a crossroads, and I’m leaning towards giving the new breed another 6 months to a year to catch up (lease modules, multi-book, centralized payments, etc) vs making a move now for the sake of immediate change. What are your thoughts on how bold finance leaders need to be in facing ERP change at this moment, in particular in the small to medium business space?

Great question, JP.

We are at a huge moment in the CFO tech stack. It’s being redefined in front of our eyes.

We’re 30 years into the ERP era, and I’d argue it has delivered far more value to the ERP industrial complex - the vendors, the implementors, the consultants - than it has to finance teams. We were promised transformation, and most finance teams never reached escape velocity out of spreadsheet hell.

Sure, we have to take our share of the blame in that, too, but I can’t help but feel that there has been a debate missing about just what it takes to run an ERP successfully. It was one of the things that inspired me to start shouting my thoughts into the internet ether.

Part of the problem is that most ERPs weren’t built with subscription business models at their heart. Twenty-five years ago, recurring revenue wasn’t the obsession it is today. Now everyone worships at that church, and some core systems are still scrambling to catch up.

AI is the game changer.

Yes, it will improve ERP functionality, but more importantly, it will make implementations faster and less painful. And that is where the incumbents and the new entrants will diverge.

The big names have breadth and stability. Decades of modules, integrations, and support that cover almost every use case. The new names are AI-native, lean, and designed around today’s problems. They will have some catching up to do on functionality, but they’ll move fast. So the trade-off is clear: stability and breadth versus speed and relevance.

So how do you choose? It comes down to urgency. If you’ve got a genuine burning platform - for example, you literally can’t consolidate, you’re breaching audit requirements, or you can’t close the books on time - then you may have to go with a big incumbent now.

But if the current system is holding together, even if it’s not perfect, then I’d be tempted to wait a little to see what emerges and review again in 12 months.

Part of this new era is that even the perimeter of the ERP itself is up for debate. Where does the ERP stop, and where do adjacent layers - FP&A, procurement, payments, payroll - begin?

The next wave of CFO tech may not look like one monolithic ERP at all, but a core with smarter satellites around it.

A successful ERP implementation is a gift you give your business for a decade or more. An unsuccessful one is a curse you live with for just as long.

So this is definitely a decision to make slowly with a high level of confidence, unless you have a burning platform. 

A few of the biggest stories that every CFO is paying close attention to. This is the section you might not want to see your name in.

Pour one out for CFO Leanne Cunningham’s retirement after a 30-year career, from corporate accountant to CFO of Brown-Forman (parent company to Jack Daniel’s).

Preferably, pour out some Tennessee Whiskey to help the cause of the liquor producer, who are dealing with a “choppy quarter”… along with the rest of the spirits industry.

Congrats to Leanne, a well-timed retirement, indeed. That exit was as smooth as… well, you know.

Some are born turnaround CFOs, some achieve turnaround CFO-ness, and some have the turnaround CFO life thrust upon them. CFO Jill Timm has been working her way through the ranks at Kohl’s since 1999, achieving CFO status in 2019.

And now she’s sitting in the hot seat of a turnaround that appears to be making positive progress…

Despite the hot mess of turnover in the CEO seat (anyone remember the Ashley Buchanan debacle?), Kohl’s is turning the corner. You can bet Jill has been a key force in that.

CFO: Hey, we have a new shareholder on the cap table.

CEO: Great, who are they?

CFO: um……

ICYMI, here are some of my favorite finance/business social media posts from this week. In the words of Kendall Roy, “all bangers, all the time.”:

Sure, the commentary is a joke (I hope), but that chart is a reminder of just how early we are in the AI race.

I never quite understood why poor old KPMG are always the butt of the jokes. But also, it’s funny, so who cares …

Let me know what you thought of today’s Mailbag. Just hit reply… I read every message.

On Saturday, we discussed the story of a little-known (imaginary) company: Frostbite. This hypothetical (yet very realistic) case study allows us to navigate the bigger picture of capital design structure and strategy in the culmination of our August exploration into all things capital.

Check it out now

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.