What is 'Gap Analysis'

Gap analysis refers to the process through which a company compares its actual performance with its expected performance to determine whether it is meeting expectations and using its resources effectively. Gap analysis seeks to define the current state of a company or organization and the target state of the same company or organization. By defining and analyzing these gaps, a business management team can create an action plan to move the organization forward and fill the gaps in performance.

BREAKING DOWN 'Gap Analysis'

Conducting a gap analysis can help a company re-examine its goals to determine whether it is on the right path for accomplishing them. Gap analysis consists of four steps, ending in a compilation report that identifies areas of improvement and outlines an action plan to achieve increased company performance. The steps are: Construct organizational goals, benchmark the current state, analyze the gap data, and compile a gap report.

The Four Steps of Gap Analysis

The first step is to accurately outline and define the organizational goals. All goals need to be specific, measurable, attainable, realistic and timely. The second step is to use historical data to measure the current performance of the organization as it relates to its outlined goals. The third step is to analyze the data that was collected, which seeks to understand why the measured performance is below the desired levels. The fourth and final step is to compile a report based on the quantitative data collected and the qualitative reasons why the data is below the benchmark, and to identify action items needed to achieve the organization's goals.

Gap analysis was widely used in the 1980s, typically in tandem with duration analysis. It is considered harder to use and less widely implemented than duration analysis, but it can still be used to assess exposure to a variety of term structure movements.

Gap Analysis in Asset Management

Gap analysis is also a method of asset-liability management that can be used to assess interest rate risk or liquidity risk, excluding credit risk. It is a simple IRR measurement method that conveys the difference between rate-sensitive assets and rate-sensitive liabilities over a given period of time. This type of analysis works well if assets and liabilities are composed of fixed cash flows. Because of this, a significant shortcoming of gap analysis is that it cannot handle options, as options have uncertain cash flows.

An Example of Gap Analysis

Gap analysis is important for any type of organizational performance. For example, Minnesota's Spring Valley announced on July 20, 2016, that it was partnering with the University of Minnesota to conduct a gap analysis to gain insight into future local business needs. The university was expected to conduct a retail gap analysis to quantify the impact of business growth on the local economy. The study was expected to be useful for business owners who wanted to obtain loans from local banks, thereby helping to increase the number of businesses in the area.

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