It’s that time of year when many of you will be bringing your Business Plans into the current and formulating this year’s strategy.
One stage of this process that you shouldn’t overlook is called GAP Analysis.
GAP being an acronym of nothing, and literally meaning the word Gap, simply refers to the gap between your projected performance* and your desired performance*.
- Projected Performance assumes you carry on at your current Sales and Cost levels. Performance may still be projected to rise (or fall) if that is the current trend. Any measures you have already implemented or plan to implement should be incorporated within this “projected performance”.
- Desired Performance is where you want / had expected / need to be.
NB: I have known one company owner whose desired performance was below their current projected performance, and so we brought in measures to slow sales, ease operations, and ultimately create a more peaceful environment both in the office and (I think more crucially) at home … but my experience suggests this is unusual.
Once the gap has been identified, a means of bridging the gap must now be formulated.
There will of course be different strategies according to where the “gaps” reside. Even a Chartered Accountant has to accept that the gap is not always Turnover, Profits, or Costs. It may be more sales orientated in Number of Customers, Number of New Customers, Number of Sales in a specific Market Sector or Geographic Location, or something entirely unrelated again if you work in HR, IT, etc.
To share the theory – in a simplified form – from the wonderful world of Management Accounting however, there are three areas within the GAP which can be addressed, as follows:
- The Efficiency Gap – applying efficiency gain techniques such as working harder, smarter (ie moving resources to more value adding processes), or cheaper, will help to bridge smaller differences or go a long way to closing the first few percentage points in a larger gap. If the gap is in relation to Sales for example, you should perhaps analyse which industries or markets which you cater for, typically produce the easiest sales or are still experiencing growth.
- The Expansion Gap – this will require more resources and likely a bigger budget (ideally in addition to the efficiency savings undertaken above). Again, if the gap is in relation to Sales, you may need to be considering either New Products or Current Products into New Markets.
- The Diversification Gap – you need to do something differently, in addition to bridging the disparity through efficiency gains AND expansion. Again, regarding our Sales example, you may now need to be considering New Products into New Markets which is a very risky strategy by the way, so implement with caution.
Gap Analysis is of course a very simple theory but is critical to any genuine planning process and one which is commonly overlooked.
It is also a great opportunity to actually THINK about where it is you want to be, and what needs changing or adding to achieve this.
So this January, don’t simply forecast your projected results but instead attempt to think more clearly in regards to:
- Where you would like to be
- Where you thought you would be
- And where you might need to be
… in order to begin implementing the measures and allocating the budgets to the areas critical to achieving that desired or required success.
