fi config minimum requirement (1)

Enough FI/CO configuration to get going...

FI the Financials module can be thought as the 'core' of any integrated SAP System because everything that has a monetary impact in the other modules (where the 'real' business operates) flows through to FI - usually in real time and automatically through the configuration. Usually there is pressure to get going with the prototyping asap. When the other modules start prototyping their transactions, the SAP system is going to want to post the financial impact to FI. Thus the sooner that you (the FI/CO configurer) can get some core FI/CO configuration going the better for all.

Remember all SAP configuration is essentially maintaining entries in a variety of linked tables. Usually you need to maintain each little link or entry step by step. Some new SAP configurers expect the transactions to be as 'complete' as a user transaction - configuration is different. In R/2 days we had to just know what tables to maintain - count yourself lucky that you have the IMG now!

Following are some guidelines (in increasing levels of functionality) to the FI minimum configuration or master data setup for a new company code. Follow the logical path in the IMG.

1. Minimum configuration to post a journal in FI 2. Minimum configuration to see expenses by cost centre / post through to the CO Module 3. Minimum configuration to post to subledgers (AR, AP) 4. Minimum configuration to post from logistics modules to FI/CO (similar concept for other

modules)

1. Minimum configuration to post a journal in FI:

(The assumption is that you do not want to copy either the standard SAP company or an existing company code because it will copy across too much that is not similar or not required and therefore too much cleanup will be required).

Initial Business Decisions Required:

Item to be decided Comment

Code of company code (4 Digit Alphanumeric)

You could setup new one later, copying the configuration

Code of Chart of Accounts Not very visible, but the maintainers of the chart may want to decide this name

Length of the GL A/c number and the account number range guidelines, possibly also the numbers of some key accounts required for automatic postings (see below)

SAP allows 10 digits, however 5-7 appears to be the normal range. Typically the number of accounts should be in the low hundreds. Decide on the ranges of numbers for each type of account as much as you can so that the team can start getting used to them. EG: standard SAP usually has 4xxxxx as expense accounts, 11xxxx as Bank Related accounts etc.

Configuration steps:

Step Comment

Define the company code IMG

Define the name for a chart of accounts

IMG

Maintain the global parameters

IMG - Use standard SAP variants for the parameters to start with & update later

Define the default amount tolerances

IMG - Define for a blank group - so any new test user can post during prototyping

Define document number ranges

IMG - Copy from the standard ranges

Create some of the minimum accounts needed to start off with.

GL Master data:A/R and A/P control a/cs, a petty cash or suspense a/c to hold sundry offset postings while debugging, a revenue account, some expense accounts. This list will expand as you go - see the section on account determination. Suggest you create with reference from the standard chart and company code and use those specifications (account groups, fields status groups etc) for now, so that these accounts will be reasonably appropriately setup.

Now you should at least be able to post a GL journal. To test I suggest you use balance sheet accounts only, since you will not have setup the cost elements for the expense accounts. All projects would at least be using the Cost centre and Cost Element functionality of CO as a minimum. So - on to the next step.

2. Minimum configuration to see expenses by cost centre / post through to the CO Module



Structure of standard cost centre hierarchy

The structure should follow the organisations intended responsibility reporting hierarchy (the budgetary responsibility). Allow the appropriate number of levels.

Hierarchy node name coding The coding of the nodes is quite important because they can be used to report on the levels in the standard reports, and so will be very visible to the users

Cost Centre Naming Standards

Useful to begin following the intended standards ASAP so that test data looks as real as possible.


Step Comment

Define the controlling area IMG, not very visible to users, if you are only going to have one, you could default it later

Assign the company code to the controlling area

IMG

Create the beginnings of the standard cost centre hierarchy

CO - Cost Centre Master data

Create a representative set of cost centres, assigning them to the appropriate node in the cost centre hierarchy

CO - Cost Centre Master data

Create all the expense accounts as primary cost elements

Either in the IMG - for all GL accounts in a specific range, or individually in the CO - Cost Centre Master data

Now you should be able to post a GL document (journal) to an expense account and code it to the cost centre. The posting should then be viewable via Cost Centre

reporting and GL Account line Item Display.

3. Minimum configuration to post to sub ledgers (AR, AP)



GL Account Number of Control accounts

see account number range comments above


Step Comment

Create the AP and AR Control accounts in the GL

see account creation comments above

Create a couple of customer and vendor accounts

If using SD and MM too, inform the SD and MM analysts so that they can complete the account creation on the SD/MM side for the customer and vendor respectively.

Now you should be able to post a FI-AR customer invoice and an FI-AP vendor invoice.

4. Minimum configuration to post from logistics modules to FI/CO (similar concept for other modules)

So far it was relatively easy going, now it starts getting a little more difficult. Following are the very broad steps - for more detail see the sections on Organisation structure and Integration.



SD and MM organisation structure and relationship to

Not a trivial decision, and may require rework, so at this stage, decide on a simple best guess with the SD/MM

the FI/CO elements team to get you going


Step Comment

Assign the SD and MM organisation elements to the FI/CO elements

IMG; to get prototyping going you need at least 1 set of working relationships that the whole team can work with (EG: 1 Sales Area, 1 Purchasing Organisation, 1 Plant etc)

Maintain the basic automatic account determination for each module

IMG; For example : Revenue Account Determination for SD. As the modules test or prototype expanded functionality, the SAP will look for the accounts to which it should post. You could maintain on an as needed basis. The SAP documentation and configuration does not always explain clearly which piece of account determination is used for which type of functionality, so it is sometimes difficult to be pro-active. being reactive has the benefit that hopefully each side (eg: MM and FI) can develop an understanding of what the business transaction is and therefore where it should be posting. Otherwise the MM person may not even be aware that he has generated a certain type of posting ! (You'd be amazed at some of the lack of ownership from a logistics consultant for the financial postings that they generate).

Now the other modules will be able to process a thin 'path' using agreed organisation elements and base functionality, all the way through to FI.

Congratulations - you now have enough absolutely mandatory FI configured for the start of prototyping!

Period Based Accounting versus Cost of Sales Accounting

These terms come up in the SAP documentation fairly often and I frequently get asked what the difference is. There are a number of ways of explaining the differences.

For the accountants it is usually enough to say the 'Period Based Accounting' is Accrual Accounting and 'Cost of Sales' is 'Cost of Goods Sold' Accounting. In CO-PA one has the option to choose or use either Account based or Costing Based CO-PA. This choice impacts the level of detail and the frequency (monthly, weekly or real-time) of reporting.

What does this mean effectively to us non-accountants and practically in the SAP system?

Period based Accounting

"Period based" means that during the month or period, all and only actual events / transactions are posted in the appropriate period. At the end of the period estimated accruals and deferrals are made and posted to that posting period to give a more accurate view of profit. IE any expected revenues and expenditures that should relate to the current period are accrued for and equally any prepaid expenses or revenues are deferred to the next period. (Accruals and Deferrals are posted temporarily, usually to special accounts, and reversed prior to the next period end.)

These accruals and deferrals are usually done at a fairly high level of summarisation (eg: at company or business area). The FI Ledgers and financial statements etc are always period based.

Cost of Sales Accounting

Cost of Sales in SAP means that we attempt to record or rather report the "costs of sales" against the actual sale at as low a level as possible and during the period. (In CO-PA this is down to a transaction level.) This enables the company to get a reasonably accurate view of profitability on a real time basis.

This is done by using either standards or estimates for many of the components that make up the "cost of goods sold". Any variations from the standards are usually posted through to the cost of sales system either at month end or when they occur.

For example: A product cost estimate might be used to calculate and post a manufactured cost through to CO-PA when every sale goes through. The actual production orders variances from the product cost estimate can then be settled to a separate line in CO-PA. This has the benefits that a reasonably accurate gross profit could be reported in real time at a transaction level and of course therefore at all the characteristic levels in CO-PA.

The impact of any abnormal variances in production can quite clearly be seen and analysed separately from the normal profitability of a product.

Table comparison

GL (Period Based) CO-PA (Cost of Sales)

During the Month At Month End During the Month

At Month End

Manufactured Cost

goods issued from stock to "cost of goods sold" at stock valuation

plus any stock valuation adjustments

Production Estimate / unit or Stock valuation / unit applied to the number of units sold

Variances can be posted as they occur preferably to a separate line for analysis

Delivery Costs

actual freight invoices etc posted to the period whenever they come in

plus any accruals or deferrals

Freight etc estimate or charge applied to each sales invoice line item

Actuals can be allocated in for comparison or different m/end reporting

Gross Profit not useful yet useful for profitability analysis

Overhead Costsactual invoices received & posted

plus any accruals or deferrals

Overhead Cost Estimate used. Actuals recorded in CO, not available yet in CO-PA

Actuals can be allocated in to a separate line item for comparison to Estimated Cost used

Net Profitdefinitely not useful yet

Accurate Financial Statement for company or business area

useful for profitability analysis during the month

May have an additional report for m/end that shows actuals / variances

FI and CO Did you know..?

Following are some random items that were 'news' to some of my clients and occasionally even to me! Sometimes due to the setup of the system you are working on, fields or possibilities have been hidden to simplify screens or are enterable due to a combination of configuration. Thus you may not be aware that there is additional or alternative functionality there. It pays to explore if you have the access and the time, especially if it makes sense to you that such functionality should be available - often it is.

Module Item Description

FI Line item display performance using sort keys to populate the allocation field on GL, AR and AP accounts

Sort keys often place redundant data (ie data that is already on the line item) in the allocation field, and so appear unnecessary at times. However the account line item display uses index tables to provide fast display of line items where all the data required by the line layout is in the index table. Index tables are BSIS, BSID, BSIK (Open items for GL, AR, AP respectively), and BSAS, BSAD, BSAK (cleared items). The line items in the index tables are sorted by, amongst other fields, the allocation field. So judicious use of the sort key to define the most popular sorting of the line items should improve display speed. This should be taken into account when creating custom line layouts.

FI A 'Duplicate record' check can be switched on for customer and vendor masters in AR & AP

See the "change message control" configuration under AR/AP master record creation in the IMG. Insert a new entry, click the dropdown on the message number field and choose the appropriate message. This will enable a duplicate check by address. The address has to be exactly the same.

FI Descriptive text on master records

See "Define Text ID's..." under AR/AP master record creation in the IMG. Here you can define classifications or types of comments that will be allowed for the various sections of the master records. To edit / view the texts from the master record (both in general or company code (accounting) section, follow menu "Extras/texts". First line of each will be displayed. Double click to get into wordprocessing mode to enter more text.

FI Standard line item texts or formats for the line item text field can be defined

Define under IMG / FI Global settings / Document / Line Item / Define Text for line items (transaction OB56). The 4 digit abbreviation (abbr) can then be used when entering a journal line item either by typing "=abbr" or clicking on the dropdown arrow in the text field.

FI Long text for FI documents can also be used

Useful for detailed explanations of reasons for documents or adjustment postings etc. Define under IMG / FI Global settings / Document / Document Header / Define Text ID's for documents. See also for master records above.

FI Remove document entry fields for functionality that you do not need

Your document entry screens can be simplified for you personally, by eliminating fields used for functionality you do not use (special GL, inter company, foreign currency etc).

FI 'Automatic' Worklists If your users would like to use worklists but maintenance when

new customers or vendors are added, is a pain or forgotten, you could setup automatic worklists. These are updated automatically when a new master record with the appropriate criteria is added. Unfortunately this only works on the 'group key' or 'alternate payer' fields, but could nonetheless be useful. Follow menu: GL/Environment/Current Settings. Instead of clicking on 'create' follow menu: edit/auto worklist. Specify the prefix, offset & length of the part of the field you want to use to include a record in the worklist. EG: XYZ, 0, 3 will include all customers with XYZ in the first 3 digits of the group field. Note that you will not see the worklist listed until you have some master records with the appropriate data.

FI Treasury functionality you might expect in the FI module

Even if you are not 'officially' implementing Treasury, you may want to consider implementing some of the basic functions :

← Cheque deposit (records cheques received, prints deposit slips and makes appropriate postings to the Gl and AR accounts)

← Cheques cashed (manual entry or automatic entry upload) - updates the payment documents with cashed information and makes appropriate GL postings for cash flow forecasting

← Bank Statement Load - reconciles bank with incomings and outgoings

← Cash Position and Forecast. This is actually really easy to implement (surprise your client - or at least the treasurer - deliver more than expected!). The design and configuration is best done when you first setup your customer, vendor and GL accounts anyway so that the appropriate settings are made - no rework.

CO Cost Centre Currencies can be individually specified

When one sets the controlling area currency to the company code currency in CO maintenance, the currency field in the cost centre master can be entered (normally defaults from company code), and so you could run cost centres on their own currencies.

CO Standard Cost element groups for standard reports

Specify the cost element groups that the standard reports should use via transaction "ORKS - Determine Valid Cost Element Groups".

Activity based costing (ABC) attempts to create the big picture-crystal-clear, full, and accurate-by painting assorted little pictures.

ABC identifies the relationship between a business activity and all the resources needed to conduct it by assigning costs to each of those resources, thus presenting the true total expense of the entire activity.

ABC can account for so-called "soft" or indirect operating costs, and thus produce a more revealing, and perhaps startlingly different, financial picture than other accounting methodologies such as standard costing might offer.

Used properly, ABC helps management better to distinguish operations that add value from those that do not, permitting more informed decisions about such matters as pricing, product mix, capital investments, and organizational change.

In turn, ABC's advocates praise it as a more effective tool to identify and control costs, improve productivity, and increase profits.

What You Need To Know

When did ABC start?

ABC came of age in the 1980s amid manufacturers' furious efforts to raise the quality of their products while simultaneously eliminating every unnecessary cost from their operations. The dramatic improvements realized by manufacturers have led to ABC becoming a widely used tool, especially in the manufacturing industry.

What are the basic steps of ABC?

There are five:

identify the product or service to be studied; determine all the resources and processes that are required to create the

product or deliver the service, and their respective costs; determine the "cost drivers" for each resource: the cost of labor as well as raw

materials; collect cost and other data, such as time taken, for each process and

resource; use the data to calculate the overall cost of the product.

What are ABC's principal advantages?

First, ABC can gauge virtually any activity, be it a manufacturing process, a business process, the performance of a service, or an administrative operation. Second, it considers a much wider variety of resources and materials than more traditional accounting methodologies, and can thus present a more complete picture.

What are ABC's primary weaknesses?

It can be a very time-consuming exercise because of the volume of data it demands. Also, if not managed properly, ABC can transform every manager into an accountant whose energies become fixed on tracking the costs of the activity, rather than on tracking and perfecting the activity itself.

What kind of business sectors use ABC?

The list ranges from accountants to zoologists. It may be especially helpful to knowledge-based businesses that rely primarily on human services and related resources, whose total costs may be difficult to measure with more traditional accounting yardsticks.

What is critical to ABC's success?

Without gaining and maintaining the enduring commitment of all individuals, even a modestly detailed initiative will probably fail. It's also best to start with pilot projects to demonstrate success.

What preliminary steps are needed?

First, an organization must understand its activities and the resources that these require. Second, it must understand thoroughly the amount of information required, and the expense of generating that information. It must also determine what level of accuracy will be acceptable.

What To Do

Creating an ABC cost accounting system requires three preliminary steps:

converting to an accrual basis of accounting; defining cost centers and cost allocation; determining process and procedure costs.

Businesses have traditionally relied on the cash basis of accounting, which recognizes income when received and expenses when paid. ABC's foundation is the accrual-basis. The numbers this statement presents are assigned to the various procedures performed during a given period. Cost centers are a company's identifiable products and services, but also include specific and detailed tasks within these broader activities. Defining cost centers will of course vary by business and method of operation. What is critical to ABC is the inclusion of all activities and all resources. Once these steps have been taken, the results are often more than satisfying.

Banks and financial services firms, for example, have long used ABC-like methods to confirm that investments in automated teller machines would be both cheaper than continuing to rely on tellers and clerks and in their customers' best interests.

Railroad companies have used the methodology to determine the cost of processing bills of lading by hand, fax, and the Internet. Studying such costs confirmed the wisdom of using e-commerce, generating annual savings of up to $1 million.

Law firms are better positioned to confirm that the hourly fees they charge-no matter how princely they may at first appear-do, in fact, enable them to provide their services profitably.

Finally, healthcare providers use ABC to measure profitability, eliminate unnecessary costs, and plan for change. A medical practice that knows the actual cost of providing a specific service, for example, can make far better decisions about the price of managed health care.

For instance, let's say the Apple-a-Day Medical Clinic includes three physicians, Drs. Peel, Core, and Stem. Their clinic has an in-house laboratory and a radiology department. All direct revenues and expenses are allocated to the physician who performs the service and incurs the expense. Indirect variable overhead costs are allocated to each physician based on the proportion of total revenues that each generates in a given period. Fixed overhead costs are divided equally among physicians. Because of their respective incomes and expense allocations, each physician would represent a separate cost center.

Additional cost centers for this medical practice could be laboratory, radiology, and administration. As cost centers are defined, they could further be classified as, say, "patient service centers" or "support centers." In this example, laboratory, radiology, and each individual physician's activity would be patient service centers, while administration would be a support center.

Once cost centers are identified, management teams can begin studying the activities each one engages in and allocating the expenses each one incurs, including the cost of employee services. In this healthcare scenario, activities would range from actual treatment by physicians and nurses, X-rays, medical tests and assessments of their results, plus such administrative support services as personnel, bookkeeping, rent, utilities, property insurance, office supplies, advertising, telecommunications expenses, and equipment costs related to the administrative function. Rent, utilities, and property insurance are usually allocated on the basis of the square footage that the particular activity covers.

Tracking and allocating the detailed costs of individual activities and procedures can be accomplished by different methods, with various degrees of accuracy. The more detailed the cost analysis, of course, the greater the accuracy of the data. Then again, as the detail increases, so does the time and expense.

The most appropriate method is developed from time studies and direct expense allocation. Management teams that choose this method will need to devote several months to data collection in order to generate sufficient information to establish the personnel components of each activity's total cost. The cost of this exercise itself can be significant, but also worthwhile. Proponents say ABC has resulted in cost savings worth as much as 14 times the cost of the exercise. More importantly, the exercise has provided solid documentation for decisions that "seemed correct," as a Chrysler Corporation team once reported, "but could not be supported with hard evidence."

Time studies establish the average amount of time required to complete each task, plus best- and worst-case performances. Only those resources actually used are factored into the cost computation; unused resources are reported separately. These studies can also advise management how best to monitor and allocate expenses which might otherwise be expressed as part of general overhead, or go undetected altogether.

Notably, determining how much of an operation's personnel is underused or unused can significantly help management planning, specifically by exposing activities that are overstaffed or understaffed. This can be especially helpful to any knowledge-

based business, since payroll is almost always its highest cost. Moreover, in any business, the more efficiently an enterprise deploys its personnel, the more profitable it will be.

What To Avoid

Getting Caught Up in the Details

Notwithstanding its successes, ABC remains a tool, not an end in itself. Organizations can lose sight of that fact, if they are not careful, and end up allowing it to dominate their working lives.

The enormity and complexity of such a project should never be underestimated. The data requirements alone are daunting. It is all too easy to get caught up in ABC's details and mechanics. In turn, estimating some costs is often recommended, to minimize the level of detail.

At the same time, however, some details are important prerequisites of objectivity and success. For example, if time studies are not used, some other measure must be used to allocate personnel and related costs, as well as indirect costs such as percentage of revenues or income, or the number of customer calls. These methods require far less time for compiling data and are less costly, but drawbacks abound. For one thing, accuracy suffers, and they are almost always subjective, potentially to the point of compromising the entire initiative. Being far less precise, these alternative methods also do not differentiate between used and unused personnel resources, and will not provide information on unused capacity or trends in procedure costs.

Without the aid of computer software that has been developed to automate the process, ABC can be hopelessly time-consuming. Indeed, unaided by technology, ABC might well be hoist with its own petard and exposed as an outrageous waste of time.

Like any cost accounting system, activity based costing is not static. Once established, it needs to be maintained and updated as business conditions and organizations change.

Finally, in delivering its crystal-clear pictures, activity based costing also has the potential to make individual champions of particular products or services squirm, because it may reveal them to be far more expensive than they might otherwise appear. All the more reason for advocating caution: "Watch out what you wish for!"

If a management team is to reduce and eliminate costs, it must first identify them and grasp their impact on specific processes or products. Because activity based costing can paint a single picture that reveals all the individual direct and indirect costs a business incurs in a given operation, it can be a powerful tool for both assessing current operations and guiding prompt and intelligent reactions as circumstances change. In fact, it's also known as activity based management (ABM).

Where To Learn More

Books:

Burk, Karen B., and Douglas W. Webster. Activity Based Costing and Performance. Fairfax, VA: American Management Systems, Inc., 1994.

Livingstone, John Leslie. The Portable MBA in Finance and Accounting. 3rd ed. New York: Wiley, 2001.

Journal:

Ness, Joseph A., and Thomas G. Cucuzza. "Tapping the full potential of ABC." Harvard Business Review, July/August, 1995.

Although return on sales (ROS) is another tool used to analyze profitability, it is perhaps a better indication of efficiency. In some business environments, it is also called margin on sales percentage, or net margin.

A company's operating profit or loss as a percentage of total sales for a given period, typically a year.


Why It Is Important

ROS shows how efficiently management uses the sales dollar, thus reflecting its ability to manage costs and overhead and operate efficiently. It also indicates a company's ability to withstand adverse conditions such as falling prices, rising costs, or declining sales. The higher the figure, the better a company is able to endure price wars and falling prices. Return on sales can be useful in assessing the annual performances of cyclical companies that may have no earnings during particular months, and of companies whose business requires a huge capital investment and thus incurs substantial amounts of depreciation.

How It Works in Practice

The calculation is very basic: operating profit / total sales x 100 = percentage return on sales So, if a company earns $30 on sales of $400, its return on sales is: 30 / 400 = 0.075 x 100 = 7.5%

Tricks of the Trade

While easy to grasp, return on sales has its limits, since it sheds no light on the overall cost of sales or the four factors that contribute to it: materials, labor, production overhead, and administrative and selling overhead.

Some calculations use operating profit before subtracting interest and taxes; others use after-tax income. Either figure is acceptable as long as ROS comparisons are consistent. Obviously, using income before interest and taxes will produce a higher ratio.

The ratio's operating profit figure may also include special allowances and extraordinary non-recurring items, which, in turn, can inflate the percentage and be misleading.

The ratio varies widely by industry. The supermarket business, for example, is heavily dependent on volume and usually has a low return on sales.

Return on sales remains of special importance to retail sales organizations, which can compare their respective ratios with those of competitors and industry norms.

SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) is a method of assessing a business, its resources, and its environment. Doing an analysis of this type is a good way to better understand a business and its markets, and can also show potential investors that all options open to, or affecting a business at a given time have been thought about thoroughly.

The essence of the SWOT analysis is to discover what you do well; how you could improve; whether you are making the most of the opportunities around you; and whether there are any changes in your market—such as technological developments, mergers of businesses, or unreliability of suppliers—that may require corresponding changes in your business. This actionlist will introduce you to the ideas behind the SWOT analysis, and give suggestions as to how you might carry out one of your own.


What is the SWOT process?

The SWOT process focuses on the internal strengths and weaknesses of you, your staff, your products, and your business. At the same time, it looks at the external opportunities and threats that may have an impact on your business, such as market and consumer trends, changes in technology, legislation, and financial issues.

What is the best way to complete the analysis?

The traditional approach to completing SWOT is to produce a blank grid of four columns— one each for strengths, weaknesses, opportunities, and weaknesses—and then list relevant factors beneath the appropriate heading. Don't worry if some factors appear in more than one box and remember that a factor that appears to be a threat could also represent a potential opportunity. A rush of competitors into your area could easily represent a major threat to your business. However, competitors could boost customer numbers in your area, some of whom may well visit your business.

What is the point of completing a SWOT analysis?

Completing a SWOT analysis will enable you to pinpoint your core activities and identify what you do well, and why. It will also point you towards where your greatest opportunities lie, and highlight areas where changes need to be made to make the most of your business.

What To Do

Know Your Strengths

Take some time to consider what you believe are the strengths of your business. These could be seen in terms of your staff, products, customer loyalty, processes, or location. Evaluate what your business does well; it could be your marketing expertise, your environmentally-friendly packaging, or your excellent customer service. It's important to try to evaluate your strengths in terms of how they compare to those of your competitors. For example, if you and your competitors provide the same prompt delivery time, then this cannot be listed as a strength. However, if your

delivery staff is extremely polite and helpful, and your competitor's staff has very few customer-friendly attributes, then you should consider listing your delivery staff's attitude as a strength. It is very important to be totally honest and realistic. Try to include some personal strengths and characteristics of your staff as individuals, and the management team as individuals. Whatever you do, you must be totally honest and realistic: there's no point creating a useless work of fiction!

Recognize Your Weaknesses

Try to take an objective look at every aspect of your business. Ask yourself whether your products and services could be improved. Think about how reliable your customer service is, or whether your supplier always delivers exactly what you want, when you want it. Try to identify any area of expertise that is lacking in the business. as you can then take steps to improve that aspect. For example, you might realize that you need some more sales staff, or financial help and guidance. Don't forget to think about your business's location and whether it really does suit your purpose. Is there enough parking, or enough opportunities to attract passing trade?

Your main objective during this exercise is to be as honest as you can in listing weaknesses. Don't just make a list of mistakes that have been made, such as an occasion when a customer was not called back promptly. Try to see the broader picture instead and learn from what happened. It may be that your systems or processes could be improved so that customers are contacted at the right time, so work on boosting your systems and making that change happen rather than looking about for someone to blame.

It's a good idea to get an outside viewpoint on what your weaknesses are as your own perceptions may not always marry up to reality. You may strongly believe that your years of experience in a sector reflect your business's thorough grounding and knowledge of all of your customers' needs. Your customers, on the other hand, may perceive this wealth of experience as an old-fashioned approach that shows an unwillingness to change and work with new ideas. Be prepared to hear things you may not like, but which, ultimately, may be extremely helpful.

Spot the Opportunities

Completing a SWOT analysis will enable you to pinpoint your core activities and identify what you do well, and why. It will also point you towards where your greatest opportunities lie, and highlight areas where changes need to be made to make the most of your business.

The next step is to analyze your opportunities, and this can be tackled in several ways.

External opportunities can include the misfortune of competitors who are not performing well, providing you with the opportunity to do better. There may be technological developments that you could benefit from, such as broadband arriving in your area, or a new process enhancing your products. There may be some legislative changes affecting your customers, offering you an opportunity to provide advice, support, or added services. Changes in market trends and consumer buying habits may provide the development of a niche market, of which you could take advantage before your competitors, if you are quick enough to take action.

Another good idea is to consider your weaknesses more carefully, and work out ways of addressing the problems, turning them around in order to create an opportunity. For example, the pressing issue of a supplier who continually lets you down could be turned into an opportunity by sourcing another supplier who is more reliable and who may even offer you a better deal. If a member of staff leaves, you have an opportunity to re- evaluate duties more efficiently or to recruit a new member of staff who brings additional experience and skills with them.

Watch Out for Threats

Analyzing the threats to your business requires some guesswork, and this is where your analysis can be overly subjective. Some threats are tangible, such as a new competitor moving into your area, but others may be only intuitive guesses that result in nothing. Having said that, it's much better to be vigilant because if potential threat does become a real one, you'll be able to react much quicker: you'll have considered your options already and hopefully also put some contingency planning into place.

Think about the worst things that could realistically happen, such as losing your customers to your major competitor, or the development of a new product far superior to your own. Listing your threats in your SWOT analysis will provide ways for you to plan to deal with the threats, if they ever actually start to affect your business.

Use Your Analysis

After completing your SWOT analysis, it's vital that you learn from the information you have gathered. You should now plan to build on your strengths, using them to their full potential, and also plan to reduce your weaknesses, either by minimizing the risk they represent, or making changes to overcome them. Now that you understand where your opportunities lie, make the most of them and aim to capitalize on every opportunity in front of you. Try to turn threats into opportunities. Try to be proactive, and put plans into place to counter any threats as they arise.

To help you in planning ahead, you could combine some of the areas you have highlighted in the boxes; for example, if you see an external opportunity of a new market growing, you will be able to check whether your internal strengths will be able to make the most of the opportunity. For example, do you have enough trained staff in place, and can your phone system cope with extra customer orders? If you have a weakness that undermines an opportunity, it provides a good insight as to how you might develop your internal strengths and weaknesses to maximize your opportunities and minimize your threats.

The basic SWOT process is to fill in the four boxes, but the real benefit is to take an overview of everything in each box, in relation to all the other boxes. This comparative analysis will then provide an evaluation that links external and internal forces to help your business prosper.

What To Avoid

Focusing just on a few issues

Don't just focus on the large, obvious issues, such as a major competitor encroaching on your business. You need to consider all issues carefully, such as whether your

Internet system provides everything you need or whether your staffing levels are as they should be.

Completing your SWOT analysis on your own

Do take advantage of other people's contribution when you're completing your SWOT analysis; don't try and do it alone. Other people's perspectives can be very useful, particularly as they may not be as close to the business as you are. This distance can often help them see answers to thorny questions more easily, or to be more innovative: we all get stuck in a rut at points.

Using your analysis for the next ten years

Don't do a SWOT analysis once and then never repeat the exercise. Your business environment will be constantly changing, so use SWOT as an ongoing business analysis practice.

Relying on SWOT to provide all the answers

Use SWOT as part of an overall strategy to analyze your business and its potential. It is a useful guide, not a major decision-making tool so doesn’t base major decisions on this analysis and nothing else.

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