Business analysis tools are different methods stakeholders use to assess a company’s operations. In most cases, the purpose of the analysis is to determine how effective or efficient a company is in the overall market. A few different tools are accounting ratios, SWOT analysis, and the balanced scorecard. Each one takes a different approach when reviewing the company’s financial and nonfinancial aspects. Both internal and external stakeholders can use business analysis tools as a determination of a company’s overall strength in the business environment.
Accounting ratios are among the easier analysis tools to compute and use in business assessment. These ratios use information from both the income statement and balance sheet in order to provide indicators of a company’s financial strength. In particular, the ratios measure a company’s liquidity, profitability, asset use, and financial leverage along with other financial areas. While a good tool for use at the end of each month, financial ratios do have some flaws. First, the ratios are useless by themselves as they need another source for comparison; second, the ratios only use information from the financial statement for review.
SWOT stands for strengths, weaknesses, opportunities, and threats. In terms of business analysis tools, SWOT analysis is valuable because it reviews both internal and external factors that can relate to a company’s operations. Strengths and weaknesses are the internal factors; essentially, they are the things a business does well and does not do well. Opportunities and threats represent the external factors. Opportunities are new items or business areas in which a company can engage, while threats represent the potential competitors in the market or new opportunities.
The balanced scorecard is an increasingly popular assessment among other business analysis tools. The scorecard has four different perspectives: financial, business process, learning and growth, and customer. Each perspective looks at specific information related to its overarching focus. Taken together, all perspectives should provide information that helps a company reach its goals and develop strategies. The balanced scorecard may also be able to help a company plan future operations.
Other business analysis tools are available for a company to use if necessary. Owners and executives can often review other tools, such as decision trees, risk analysis, or game theory among others. The important thing to remember is selecting a tool that allows a company to include all factors necessary for the assessment process. Hiring a consultant may also be possible to review and improve a company’s operations. Either way, a company should use whatever works best for the business.