Improving certain areas of your business leads to achieving higher goals and towards growth. Knowing how to get there, though, requires knowing exactly what’s missing from your operations and what’s preventing you from getting things done. Gap analysis, as explained by this useful source, is the tool that helps you identifying those missing parts and thus ultimately leading your business towards greater success.

What Is Financial Gap Analysis?

Gap analysis aims at comparing where you are to where you want to be and identifying the faults that are leading to a discrepancy in those two pictures. That allows you to create reasonable goals to help, well, fill the gaps and improve the overall operations of your company. You have certain business goals and if you’re not achieving them, you’re not achieving them for a reason. This analysis helps pinpoint those reasons.

Your desired financial performance won’t always be in tune with your actual financial performance. So, using financial gap analysis determines if there is a difference between those two, which is a valuable tool not only in identifying the lacks and weaknesses but also in overcoming them. If you suspect that you’re not using your resources to their fullest, performing this analysis can help create an action plan and move your company forward, i.e. towards closing those gaps and meeting the target goals.

There are four stages of gap analysis, and those are:

  • Defining company goals
  • Benchmarking the current, i.e. the actual, state
  • Analyzing the found data
  • Creating a report that helps develop an action plan

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This type of analysis, as explained, helps compare the goals you’re currently achieving to the ones you’d like to achieve, leading towards reexamining those and creating a plan that will bring you closer towards the desired success. You can use it regularly to assess if you’re on the right track toward achieving those targets and to make changes and improvements as necessary. Without ever analyzing the current state of things and without identifying the gaps, you’re unlikely to accomplish the desired goals.

Financial Analysis

How To Use It?

First and foremost, you have to understand when to use financial gap analysis, as that’s where most businesses go wrong, assuming that they don’t need it when they do. Profitability fluctuations, operational efficiency changes, and even rapid growth could be indicators that you need to perform this specific investigation. You could assume that you don’t need it when you’re growing, but that’s far from the truth. Identifying the reasons why you’re growing is just as important as identifying those why you’re stagnating or struggling. You’ll get essential insights on how you operate and what’s causing the struggles or the growth, which will result in better future strategies.

Instead of using this method only when you’re underperforming, thanks to its strategic nature, you can use it at any point and regardless of your results. It can help scale your business and set it up for long-term success, as well as understand your market positioning, your labor needs and many more crucial aspects of doing business. Now that you know when to use it, you’ll have to learn how.

There are templates you can use for the analysis of financial gap, and those templates usually consist of five important steps that are closely related to the four stages of analysis that I’ve mentioned above. First off, you have to benchmark your current financial state, i.e. measure the current objective reality using the financial data that you have available. This particular data will serve as a baseline against which the future potential for growth will be measured. Operating profit margin and gross profit margin are the key financial indicators to look at in this step.

After you’ve assessed the current state, you’ll have to proceed to defining your future goals, as well as identifying what will lead to meeting them The desired financial situation should, clearly, be based on the exact same measures as the current one. After you’ve identify the desired goals, you’ll proceed to the third step, i.e. the step of analyzing the actual gap data, doing your best to be as specific about it as possible, to determine the root of the problem and to determine the financial position by looking through the company’s financial statements, including the balance sheet, the cash flow statement and the income statement.

Making that action plan I’ve mentioned previously is the fourth step. Its aim is to address the issues identified in the previous stages, all in the effort to bridge the gap. The solution will sometimes be simple and straightforward, while other times it may require more effort and more strategies. Monitoring the progress of the actual plan, and reevaluating your current financial position and your goals is all done in the fifth step. Repeating this process continuously is important for the proper functioning of your business.