Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.
A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.
Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.
Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.
The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.
When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.
As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:
Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.
In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.
Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.
Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.
Tried and true
A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. Our firm can help you with the tax, accounting and financial aspects of this approach.
© 2021 Covenant CPA
The recently released 2020 Association of Certified Fraud Examiner’s (ACFE’s) occupational fraud study, Report to the Nations, reveals that the most common behavioral red flag exhibited by fraud perpetrators is living beyond their means. Also high on the list are financial difficulties and unusually close relationships with vendors and customers.
Some of these signs may be tough to spot if you don’t work closely with an occupational thief. That’s why the ACFE report also looks at correlations between fraud and non-fraud offenses and human resources issues. When these issues are present, supervisors and HR managers may need to increase their scrutiny of an employee.
Recognize red flags
The vast majority (96%) of occupational fraud perpetrators have no previous criminal record and 86% have never been punished or fired by their employers for fraud. This may make identifying the thieves in your midst difficult, but not impossible. The ACFE has found that approximately 85% of perpetrators exhibit at least one behavioral red flag before they’re discovered.
Although a perpetrator may be the friendliest and most cooperative person in the office, many thieves come into conflict with colleagues or fail to follow rules. The survey participants (more than 2,500 defrauded organizations) were asked whether the perpetrator in their cases engaged in any non-fraud-related misconduct before or during the fraud incident. Close to half (45%) responded “yes.” Some of the most common offenses were:
- Bullying or intimidation of others,
- Excessive absenteeism, and
- Excessive tardiness.
A small number also was investigated for sexual harassment and inappropriate Internet use.
In addition to misconduct, some fraud perpetrators exhibited work performance problems. Thirteen percent received poor performance evaluations, 12% feared the loss of their job and 10% were denied a raise or promotion.
When misconduct or poor performance leads to disciplinary action, supervisors and HR managers have a golden opportunity to potentially stop fraud in progress. After all, the longer a scheme goes undetected, the more costly it is for the organization. Fraud schemes with a duration of less than six months have a median loss of $50,000, but those with a median duration of 14 months (the typical scheme in the ACFE report) experience losses of around $135,000.
So if you detect smoke, look for fire. Of course, most underperforming employees aren’t thieves. But it probably pays to observe any worker who routinely flaunts the rules, antagonizes coworkers or lets job responsibilities slip. You may discover other red flags, such as family problems, addiction issues or a lifestyle that isn’t supported by the employee’s salary.
Knowing your employees is only part of the solution. You also need comprehensive internal controls to limit opportunities to commit fraud. Contact us for help.
© 2020 Covenant CPA