With the role of accountants becoming increasingly automated, analytical skills are becoming more critical than ever. In order to provide good financial advice about the future, to help the managers of a business to make the best decisions, it is critical we understand both the current context in which we operate, and likely developments in the near future.
How do we sharpen our analytical tools?
By undertaking UK PEST Analysis. You will probably remember this from your professional studies but might have filed it away in the recesses of your mind. In fact, it is a useful tool to get you and your business ready to take advantage of opportunities and to mitigate risk.
Let's refresh our memories.
PEST is a methodology for analysing the external factors that affect the sector a business or firm operates in. The letters stand for:
These factors are normally beyond the organisation's control. However, they can have a profound impact on the organisation, either as threats or as opportunities.
In case you're confused, you may also have heard it described as PESTLE analysis. The longer acronym also includes legal and environmental factors. Here we will restrict ourselves to the shorter version, but legal and environmental factors are still included. We've included legal in the political section and environmental in social and political.
Why is it important to do a PEST analysis?
The answer is that we need to be aware of the context within which we operate if we are to avoid being caught out by events beyond our control and are going to make ourselves ready to take advantage of opportunities. We spend so much of our time looking inwards, analysing what we do and how we can do it better, that the opportunity to look up and outwards is valuable.
Which parts of a PEST analysis will be most important will vary according to the industry you are in. For example, a B2C business might be mostly concerned with social factors - the changing attitudes of its customers. On the other hand, a global defence contractor is much more likely to be interested in political factors.
As accountants, we generally feel that we should have a basic understanding of the economic environment, but in fact different businesses vary as to how susceptible they are to changes in economic indicators.
Letís get on with it
Over the next few weeks we will be looking in detail at each of the four areas, starting with Political Factors.