Setting goals and achieving them are so important in every aspect of business, but many businesspeople and entrepreneurs do not pay enough attention to the gap between where they are and where they want to be. Gap analysis is the process of looking at the difference between your goal and where you currently are.

Typically, when entrepreneurs look at the various goals they want to achieve, they often evaluate them incorrectly. If the strategic goal of a firm is to have sales of $15 million for 2010, the focus is on the wrong metric. Rather than focusing on total sales, the emphasis should be on the gap between the $12 million in sales they had in 2009 and the $15 million in sales they want to achieve in 2010. The $3 million shortfall is the performance gap, and gap analysis focuses on that amount as opposed to the total $15 million, presenting a much clearer picture of what must be done to achieve the goal. This approach assumes that everything required to maintain the current $12 million sales level is also part of the strategic plan.

While gap analysis is appropriate for any performance issue, budgeting is another major area where gap analysis is critical. Gap analysis places the focus on the incremental funds that you must spend and the incremental benefits of those expenditures. Too often I see firms making terrible mistakes as a result of not focusing on the gap.

In one example, a firm was considering two projects, the first of which cost $1 million, and the second of which cost $1.5 million. The net benefit of the first project was $100 thousand a year, and the net benefit of the second was $110 thousand a year. Gap analysis focuses on the $500 thousand of additional funds needed for the second project as well as the $10 thousand difference in incremental annual benefit.

The gap analysis of this scenario shows that by choosing the second project our yield will be only two percent of the additional funds needed, and is therefore, a very hard decision to justify. Gap analysis clearly shows that the best decision would be to select project number one.

Yet another area where gap analysis has critical applications is training. Gap analysis can quickly determine what type of training can produce the best results. For example, suppose your gap analysis reveals that due to the continual changes in technology, you need additional training for your IT department. First, you must determine the current skill level of your employees, and second, you must identify where you want them to be relative to the new skill set. Training should then focus on getting them from their current skill level to the desired level. Then by simply looking at the alternative ways to fill the actual gap between where they are now and where they have to be, you can make appropriate decisions.

Gap analysis is one of those ways of thinking about what you have to work on. It is just so easy to fall into the trap of looking only at the overall goal rather than the gap that needs to be narrowed or filled to achieve that goal.