In reality, a firm's accounting statements are just one of many other factors that are worthy of a full analysis in order to determine the performance of a firm.
One of the most effective tools for analysis and prediction is the SWOT analysis.
This tool looks for:
- S= Strengths
- W= Weaknesses
- O= Opportunities to grow
- T= Threats
The SWOT analysis was invented at the Stanford Research institute by management consultant Albert Humphrey, in the year 1960. The SWOT formula was designed with the premise that all companies, particularly those which are in the Fortune 500, need a specific way to reach financial goals in a reasonable time period.
This can also apply to any business, or firm. The formula is universal enough to be replicated in different business scenarios.
In the case of the firm that you propose, the budget and accounting documents need to be analyzed as part of the process of categorizing them according to where they belong in a SWOT.
The analytical questions to be asked are:
a) Do the financial statements show organization and good documentation?
b) Are all accounts in order?
c) Is the data matching the financial processes in place?
Upon analyzing the accounting documents, which are also known in business jargon as "the books", there are four options as to what to do with the information you gather.
If the answer to all of the previous questions is "YES":
If the financial statements show organization and good documentation, the accounts are in order, and the data matches the financial processes already in place, then the firm's accounting documents would be categorized as a "strength".
This means that the company can count on this process to continuously improve performance in the future. This is an easy predictor.
If the answer is "NO":
If the books are disorganized, there is no documentation, accounts are in disarray, and the data makes no sense, then the firm's accounting statements would fall under "weakness". Immediately, the firm should consider a re-haul in financial personnel, complete with training and a new action plan.
If the accounting books show signs of continuous improvement:
Finances are always challenging, especially when a firm is fairly new to the business. However, if the books show that a plan is in place and that there are steps being taken to make it succeed, then it would fall under " opportunities". This part of the SWOT refers to the chances that a firm or company has to improve and run the market at a given time.
The thing here is that, when all stockholders buy into a plan and work for it, the chances for success are extremely high. This is what the Association of Supervision and Curriculum Development (ASCD) has called a "shared vision".
Another way to demonstrate opportunity is showing how much better the books in this one firm fare, compared to those of other firms. Any chance to get ahead, is an opportunity.
If the accounting books show that only a few people know how to truly operate "the books"...,
If the books are only ran by a few people who refuse to share or disclose essential information to stockholders, then the books may pose to be a threat to the firm that could ruin its reputation. This lack of organization would be considered a "threat" as well as a "weakness" that could ruin the enterprise due to its lack of transparency. This makes it hard to show validity and reliability as it is.
As you can see, the financial statements of a firm can fall under any of the analytical categories addressed by the SWOT. Numbers alone do not tell the story of what is going on in a firm. The way that the firm reaches the numbers, and the correlations made between data, process, and productivity are much more important than to observe "the books" in isolation.
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