A financial gap analysis is a tool that managers can use to determine if there is a difference between their desired financial performance and their actual financial performance. This can be a valuable tool for not just understanding gaps in financial performance, but for overcoming them. Therefore, managers should understand the components of a financial gap analysis and its purpose.
Current Financial Situation
The current situation is the status quo for the company. It represents an objective reality which can be measured using currently available financial data. For example, if a company wants to perform a gap analysis of profits, then the current situation would be based on the most recent annual, quarterly or monthly profits. The current situation serves as a baseline against which future growth potential can be measured.
Desired Financial Situation
The desired financial situation is the company's goal for financial performance. It should be based on the same measures as the current situation; for example, if the current situation is a measure of revenues, then the desired situation should also be based on revenues. This allows the current and desired situations to be effectively contrasted.
In a financial gap analysis, the gap is measured between the current financial situation and the desired financial situation. The gap is, quite simply, the difference between the two. For example, if a firm has current sales of $100,000 per year and desired sales of $150,000 per year, then there is a gap of $50,000. This means that the firm must increase its sales by $50,000 annually to achieve its desired financial performance.
A financial gap analysis allows a company to see where it stands relative to its desired performance. Knowing if there is a gap, and if so how large it is, can allow a company to focus on the gap in order to bring its financial performance up to the desired level. For example, if there is a gap in sales, the business may want to invest more heavily in marketing or it may need to develop more innovative products.
- mind the gap warning sign on a railway platform image by Steve Mann from Fotolia.com