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.
2.
3.
4.

Minimum configuration
Minimum configuration
Minimum configuration
Minimum configuration
modules)

to
to
to
to

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

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 GL Master data:

accounts needed to start off A/R and A/P control a/cs, a petty cash or suspense a/c to hold
with.
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
Initial Business Decisions Required:
Item to be decided

Comment

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.
Configuration steps:

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 CO - Cost Centre Master data

standard cost centre hierarchy
Create a representative set of CO - Cost Centre Master data
cost centres, assigning them
to the appropriate node in the
cost centre hierarchy
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)
Initial Business Decisions Required:
Item to be decided

Comment

GL Account Number of Control

accounts

see account number range comments

above

Configuration steps:
Step

Comment

Create the AP and AR Control see account creation comments above

accounts in the GL
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.
Initial Business Decisions Required:
Item to be decided

Comment

SD and MM organisation
Not a trivial decision, and may require rework, so at this
structure and relationship to stage, decide on a simple best guess with the SD/MM team
the FI/CO elements
to get you going

Configuration steps:
Step

Comment

Assign the SD and MM

IMG; to get prototyping going you need at least 1 set of working
organisation elements to the relationships that the whole team can work with (EG: 1 Sales Area, 1
FI/CO elements
Purchasing Organisation, 1 Plant etc)
Maintain the basic automatic IMG; For example : Revenue Account Determination for SD. As the
account determination for
modules test or prototype expanded functionality, the SAP will look
each module
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 proactive. 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 realtime) 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
Production
goods issued from
Estimate / unit or Variances can be posted
plus any stock
Manufactured stock to "cost of
Stock valuation /
as they occur preferably
valuation
Cost
goods sold" at stock
unit applied to the to a separate line for
adjustments
valuation
number of units
analysis
sold
actual freight
Freight etc
invoices etc posted
estimate or charge Actuals can be allocated
plus any accruals
Delivery Costs to the period
applied to each
in for comparison or
or deferrals
whenever they come
sales invoice line different m/end reporting
in
item
useful for
Gross Profit
not useful yet
profitability
analysis
Overhead Cost
Actuals can be allocated
Estimate used.
actual invoices
plus any accruals
in to a separate line item
Overhead Costs
Actuals recorded in
received & posted
or deferrals
for comparison to
CO, not available
Estimated Cost used
yet in CO-PA
Accurate Financial useful for
May have an additional
definitely not useful Statement for
profitability
report for m/end that
Net Profit
yet
company or
analysis during the shows actuals /
business area
month
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'
See the "change message control" configuration under AR/AP
check can be switched master record creation in the IMG. Insert a new entry, click the
on for customer and
dropdown on the message number field and choose the
vendor masters in AR & appropriate message. This will enable a duplicate check by
AP
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

Useful for detailed explanations of reasons for documents or
documents can also be adjustment postings etc. Define under IMG / FI Global
used
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 When one sets the controlling area currency to the company
can be individually
code currency in CO maintenance, the currency field in the cost
specified
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 Specify the cost element groups that the standard reports should
groups for standard
use via transaction "ORKS - Determine Valid Cost Element
reports
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 accrualbasis. 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 knowledgebased 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.
What You Need To Know
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 marketsuch as technological developments,
mergers of businesses, or unreliability of suppliersthat 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 You Need To Know
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 weaknessesand
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 customerfriendly 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 doesnt base major decisions
on this analysis and nothing else.