Tools and techniques for conducting financial analysis
Tools and techniques that can be used to conduct financial analysis more accurately and comprehensively
Islam Mohamed - • Corporate finance management
Continuing the financial analysis articles that I started with pestle analysis and after we have provided an overview of pestle analysis and its basic applications, let's delve more deeply into the tools and techniques that can be used to conduct financial analysis more accurately and comprehensively.
* SWOT analysis: pestle analysis can be combined with SWOT analysis to assess the company's internal strengths and weaknesses, as well as external opportunities and threats identified through pestle analysis.
* Scenario analysis: this technique is used to visualize a set of possible receptors based on a set of factors. They can be used to identify risks and opportunities that the company may face in the future.
* Quantitative analysis programs: many programs are available that can help companies collect and analyze big data related to external factors, such as big data analysis programs and artificial intelligence programs.
* Survey tools: surveys can be used to help companies understand the opinions of customers and employees on social, economic and political issues.
We discuss the most important tools and techniques used in the analysis of companies and auxiliary tools for this:
SWOT analysis: an essential tool for evaluating companies
What is SWOT analysis
SWOT analysis is a simple and effective strategy tool used to assess the strengths (Strengths), weaknesses (Weaknesses), opportunities (Opportunities) and threats (Threats) facing a company or project. It serves as a” microcosm " of the company, highlighting its internal and external aspects.
* Strengths: resources and capabilities that distinguish the company from its competitors.
* Weaknesses: aspects that weaken the company's ability to compete.
* Opportunities: external events and factors that the company can exploit to achieve growth.
* Threats: external factors that may adversely affect the company.
The importance of SWOT analysis in evaluating companies
* Identification of competitive advantages: helps determine what distinguishes the company from its competitors.
* Vulnerability detection: helps in identifying aspects that need improvement.
* Identify opportunities: helps identify potential growth areas.
* Risk assessment: helps identify threats that the company may face.
* Formulation of strategies: provides the basis for the development of effective strategies.
How to perform SWOT analysis ?
1. Goal setting: determining the purpose of conducting the analysis (evaluating the company, launching a new product, etc.).
2. Data collection: collecting information about the company, the market, and competitors.
3. Data analysis: classifying information into categories of Strengths, Weaknesses, Opportunities, and threats.
4. Evaluation of results: identification of the relationship between various factors.
5. Making plans: developing strategies to strengthen strengths, overcome weaknesses, seize opportunities, and mitigate threats.
The relationship between SWOT analysis and PESTLE analysis
Both are business analysis tools, but each has a different focus:
* PESTLE analysis: focuses on external factors that affect the company (political, economic, social, technological, legal, environmental).
* SWOT analysis: focuses on internal and external analysis of the company.
PESTLE analysis can be used to identify some of the factors that appear in SWOT analysis, such as opportunities and threats.
Advantages of SWOT analysis:
* Simplicity: anyone can understand and apply it.
* Flexibility: it can be applied to any type of business.
* Comprehensive: covers multiple aspects of the business.
Limitations of SWOT analysis:
* Subjective: the results depend on the opinions of analysts.
* Constant: it may not take into account rapid changes in the environment.
* Not enough alone: it should be used in combination with other analysis tools.
* Thus SWOT analysis is a valuable tool for evaluating companies. By understanding their strengths and weaknesses and the opportunities and threats they face, companies can.
- Make better strategic decisions and improve their performance.
- SWOT analysis can be used at the level of the strategic unit, and not only at the level of the entire company.
- SWOT analysis can be repeated periodically to keep up with changes in the environment. - Integrate SWOT analysis with other analysis tools in order to identify a broader and deeper vision.
Why integrate SWOT analysis with other tools
* Integrated vision: each analytical tool offers a different perspective. Their combination gives a more realistic picture of the current and future state of the company.
* Better decisions: helps to make more informed decisions, supported by multiple data and analytics.
* Identify hidden opportunities: various tools may reveal opportunities that were not identified in the SWOT analysis alone.
* Better risk assessment: helps to assess risks more accurately and determine the appropriate strategies to deal with them.
Analytical tools that can be integrated with SWOT:
* PESTLE analysis: as mentioned earlier, PESTLE provides a comprehensive overview of the external environment in which the company operates.
* Value analysis: helps in understanding the value that the company offers to customers and how it can be improved.
* Porter's Five Forces Analysis: helps assess the strength of competition in the industry and identify the driving forces behind change.
* Value chain analysis: helps in understanding the activities that create value for customers and how efficiency can be improved.
An example of combining SWOT with PESTLE:-
Suppose we are analyzing a technology startup. We can merge SWOT and pestle as follows:
- SWOT factors identify strengths ( innovative teamwork) ,identify weaknesses ( lack of funding), identify opportunities ( rapid growth in the market ) ,identify threats (fierce competition ).
Through this merger, we see that the company has a strong staff and advanced technology, but is underfunded and faces fierce competition. Rapid technological changes and government regulations also pose significant challenges.
How to integrate tools effectively:
* Goal setting: set the goal of the analysis before starting.
* Data collection: collect adequate data from all relevant sources.
* Identify relationships: find the relationships between the results you got from each tool.
* Develop strategies: use the results to develop comprehensive strategies to achieve the company's goals.
Hence, we see that the integration of SWOT analysis with other analysis tools provides a more in-depth understanding of the company and leads to more informed decision-making. By looking at the company from different angles, managers can identify hidden opportunities, overcome challenges, and achieve sustainable growth.