What is a Profit Gap Analysis?
In business terms, a profit gap is simply the difference between the desired net profit (or profit margin) of the business compared to the current result. A profit gap analysis, however, is the process of defining what the potential profit is and how the business can achieve it.
Much like Setting SMART objectives, using an analytical approach to establish desired profit ensures a realistic and achievable goal for business owners.
How is a Profit Gap Analysis used?
Determining a profit gap enables business owners to develop specific strategies to achieve the profit goal. Via analysing the profit potential, businesses will be able to define where there is an opportunity for growth. As well as, where the business is excelling.
Thus, business owners can focus on the areas of the business which can be improved or streamlined to generate the highest net profit returns.
How do you undertake a Profit Gap Analysis?
The process of undertaking a profit gap analysis varies for different industries. The key difference is between goods and service-based entities and further, entities with large assets.
The most accurate way to determine the potential profit for a business is to assess what other businesses are achieving in the same industry. This includes comparing both revenue and expenses, as well as productivity ratios.
For service firms, profit is often linked to employee productivity and performance, thus analysing your competitor’s employee performance can give great insight into profit potential.
However, for goods-based businesses, owners should analyse gross profit margins to determine if they are spending too much on the cost of goods sold.
Our Benchmarking Suite includes an in-built Profit Gap Analysis to undertake all this work for you. Our tool enables you to see the profit potential of your client’s business in just a few clicks.