Gap Analysis

What Is a Gap Analysis?

A gap analysis is the process companies use to compare their current performance with their desired, expected performance. This analysis is used to determine whether a company is meeting expectations and using its resources effectively.

A gap analysis is the means by which a company can recognize its current state — by measuring time, money, and labor — and compare it to its target state. By defining and analyzing these gaps, the management team can create an action plan to move the organization forward and fill in the performance gaps.

Understanding a Gap Analysis

When organizations aren't making the best use of their resources, capital, and technology, they may not be able to reach their full potential. This is where a gap analysis can help.

A gap analysis, which is also referred to as a needs analysis, is important for any type of organizational performance. It allows companies to determine where they are today and where they want to be in the future. Companies can reexamine their goals through a gap analysis to figure out whether they are on the right track to accomplishing them.

Gap analyses were widely used in the 1980s, typically in tandem with duration analyses. A gap analysis 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.

There are four steps in a gap analysis, ending in a compilation report that identifies areas of improvement and outlines an action plan to achieve increased company performance.

The "gap" in a gap analysis is the space between where an organization is and where it wants to be in the future.

The Four Steps of a Gap Analysis

The four steps of a gap analysis are the construction of organizational goals, benchmarking the current state, analyzing the gap data, and compiling a gap report.

Where Gap Analysis Is Used

Gap analysis can be used by organizations of varying degrees, from large corporations to small businesses. There is no limit to which areas can benefit from using this strategy; these areas include the following:

Gap Analysis in Asset Management

Gap analysis is also a method of asset-liability management that can be used to assess interest rate risk (IRR) 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.