Distribution Accounting Software

Distribution brings an additional level of complexity to standard accounting, since a distributor acts both like a buyer and a seller. In fact, every major accounting system provider has solutions specifically targeted at distributors. We wrote this buyer’s guide to help buyers unlock this arcane market.

Here’s what we’ll cover:

What is Distribution Accounting Software?
What Type of Buyer Are You?
The Vendor Landscape

Market Trends You Should Understand
Benefits & Potential Issues

What is Distribution Accounting Software?

“The language of business is accounting.” accounting software for distributors manages all of the financial transactions and operations for a distributor and includes special functionality unique to distribution. It comprises general ledger, accounts receivable, and accounts payable. Inventory is often handled by a separate system, but could be one component in a complete enterprise resource planning (ERP) suite.

Three things in particular are different in distribution software. First is a focus on handling large volumes of transactions. Distributor margins are often described as “razor thin;” profitability comes from handling large quantities of transactions efficiently. Second is the unique requirement to handle large numbers of both vendors and customers. Since distributors sit between manufacturers and retailers, relationship management is important on both sides.

The third unique characteristic is a consequence of the other two. In order to effectively process orders with a large number of providers and customers, distribution systems need to integrate directly with suppliers’ systems and retailers’ systems. However, each different system may be from a different software provider. The distributor’s system must correctly pass and receive data from and to a variety of systems.

Most large distributor systems are still installed on premise because of the networking infrastructure required to support a warehouse. One of the cost justifications for cloud-based applications is the reduced cost for infrastructure. Cloud-based programs have long-term benefits for wholesale distributors but this sector has not aggressively adopted that technology. Smaller distributors with more manual operators may benefit from cloud-based systems.

What Type of Software Buyer Are You?

You’ll need to determine what type of buyer you are as part of evaluating distribution software. Over 90% of buyers fall into one of these four groups:

• Full-suite buyer. These buyers value the seamless integration of data and processes that comes from having one system for all functions. For example, a full-suite system for accounting, customer relationship management and inventory management can turn quotes automatically into orders and then generate picking lists, shipping labels, and invoices. These buyers favor complete software suites like Oracle, SAP, Sage ERP or Microsoft Dynamics AX.
• Multiple warehouse operations buyer. These buyers run multiple facilities and need to track and balance inventories over a geographical area. The buyers require software that can handle the accounting information from each location and still provide a single view of the operation. It must also track different tax information if the locations are in different jurisdictions.
• Departmental buyer. These buyers are distribution specialists for firms that have an internal distribution network. They may only sell to their own outlets, but they must contend with multiple suppliers, inventory issues, competing corporate customers, and transportation decisions similar to commercial distributors use.
• Small business buyer. These buyers may work for distributors or wholesalers or may have a distribution component as part of their company. They usually have smaller numbers of clients, suppliers, and inventory and may include some assembly or production components but still face the same basic issues as large-scale distributors. These buyers are often using paper-based tools or general accounting systems like Intuit or Peachtree. 

The Vendor Landscape

Distribution solutions vary in capability and in the ability to communicate with other software packages. Buyers need to evaluate both the integration needs and the scope of their distributor system.

Market Trends You Should Understand

You could consider these market trends as you consider the top distribution accounting systems:

• Use of advance ship notice. Most manufacturers and distributors are adopting advance ship notice (ASN) to help the purchaser effectively receive their orders. The ASN provides the purchaser with a list of the shipment’s contents and matching bar codes, allowing the purchaser to pre-stage the receiving area to effectively count and stock the shipment.
• Use of web-based front ends. Most accounting systems are allowing the use of web-based technologies like browsers to provide information to upstream (vendor) and downstream (customer) partners. For example, a customer can verify that an order was received and is pending by logging on to a special website with information generated by the accounting system.
• Availability of a management dashboard. For years, managers generated periodic and on-demand reports to monitor operations. As supply chain systems become more integrated with suppliers and customers, printed reports are too time consuming to use. Replacing them are dashboards, that display key measures such as inventory turn, time to ship, discounts available, or total accounts receivable. Systems can even provide email or text messages to notify managers when extraordinary events occur, such as a large order received or a customer account overdue for 90 days.

Benefits & Potential Issues

There must be specific benefits to justify the costs of purchasing and implementing an accounting system.

• Better cost control. A distribution accounting system gives a much better view of costs and margins. Increased information lets managers understand and control costs better.
• Automated discount tracking. One of the challenges facing distributors is dealing with discounts. Tracking discounts like “2% 10 NET 30” becomes more difficult when managers have to track them on both sides, the discounts available from suppliers and the discounts offered to customers. Automated discount tracking lets distributors balance discounts available against cash flow requirements to make the best business decisions. 
• Better compliance reporting. Since the distribution accounting system interfaces with other systems throughout the firm, it serves as a convenient source for all of the compliance reports. This can significantly reduce the cost of preparing compliance documents for government agencies and insurance companies.

Accounting systems are a challenge to implement and to use. There is always the temptation to bypass the systems to “get ‘er done.” This leads to bad information in the accounting system, which can flow through to supplier and vendor systems. This is not the best way to maintain good relationships in a relationship-driven business. 

Have an opinion on this guide? Email the authors. We appreciate the feedback.