Gap analysis is used to analyse the remaining gap a business needs to meet in order to hit its full year forecast. The calculated gap percentage applicable to the current year is often compared to the prior year, particularly in businesses which exhibit a strong seasonality trend. For example, where a retail business makes the majority of its sales in the winter period.
In the above example, we look at a business which generates both recurring and non-recurring revenue streams.
When revenue is recurring in nature (e.g. a software as a service (SaaS) business), the gap to go is not very useful in isolation. More focus should be placed on the current run-rate (i.e. the latest months revenue) and whether the continuation of that run-rate covers the remaining gap.
It may be useful to compare the gap relating to non-recurring revenue where there is a seasonal trend in when new customers are secured. However, the main consideration will typically be the state of the current pipeline and order book.
When looking at staff costs, it is again typically more useful to look at the current run-rate of staff costs and how that compares to the remaining gap. This is because the cost of employed individuals will typically be expected to reoccur going forwards, with the latest months staff costs typically being the most representative.
With regards to other overheads, gap analysis may be useful when the business experiences seasonality in its cost base. For example, where it attends a large trade show each December, resulting in higher overheads towards the back end of the year.
Formula to calculate the gap to go
YTGXX forecast / FYXX outturn = Gap to go %