Shortfall

What is a 'Shortfall'

A shortfall is the amount by which a financial obligation or liability exceeds the amount of cash that is available. A shortfall can be temporary in nature, arising out of a unique set of circumstances or it can be persistent, in which case it may indicate poor financial management practices. Regardless of the nature of a shortfall, it is a significant concern for a company, and is usually corrected promptly through short-term loans or equity injections.

BREAKING DOWN 'Shortfall'

For example, a temporary shortfall for a small company may arise when an accident at its production facility impedes output and revenues in a particular month. In this case, the company may resort to short-term borrowings to meet payroll and other operating expenses.

A typical long-term shortfall is the pension shortfall faced by many organizations whose pension obligations exceed the return they can generate from their pension assets. This situation generally occurs when returns from equity markets are well below average.

Shortfall risk can be mitigated through the use of efficient hedging strategies, which aim to offer protection from adverse price movements. As an example, resource companies often sell part of their future output in the forward market, especially if they are expecting to incur substantial capital expenditures in future. Such hedging helps to ensure that the finances required for a future financial obligation are available.

RELATED TERMS
  1. Interest Shortfall

    Any interest that has not been paid after the loan payments have ...
  2. Pension Shortfall

    A situation in which a company offering employees a defined benefit ...
  3. Implementation Shortfall

    In trading terms, the difference between the prevailing price ...
  4. Value Averaging

    An investing strategy that works like dollar cost averaging (DCA) ...
  5. Canadian Investor Protection Fund ...

    A Canadian not-for-profit organization set up by the investment ...
  6. Negative Gearing

    Borrowing money to buy an investment asset without receiving ...
Related Articles
  1. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  2. Investing

    What's a Liability?

    A liability is a debt. It is an obligation that arises during the course of business and represents a third-party claim on the company's assets. A liability can arise in a number of different ...
  3. Retirement

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
  4. Economics

    Explaining Long-Term Liability

    A long-term liability is an obligation a company owes a year or more into the future.
  5. Fundamental Analysis

    Spotting Creative Accounting On The Balance Sheet

    Companies have ways of manipulating their balance sheets that investors should be aware of.
  6. Taxes

    3 States On The Edge Of The Financial Cliff

    These three states are in bad financial shape. Barring a further bailout, it is difficult to say how they will make out.
  7. Economics

    Why Your Pension Plan Has Sovereign Debt In It

    One type of security pensions tend to invest in is sovereign debt, or debt issued by a government.
  8. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  9. Financial Advisors

    Pension Advances: What You Should Be Wary Of

    The terms some pension advance firms require can be costly. Here's how to be sure your clients aren't making bad decisions.
  10. Investing Basics

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
RELATED FAQS
  1. On which financial statements does a company report its long-term debt?

    Discover which financial statements are used to report a company’s long-term debt, as well as how a company uses debt to ... Read Answer >>
  2. What risks do I face when investing in the insurance sector?

    Read about the unique challenges faced by insurers, and learn how those challenges manifest themselves as risks for equity ... Read Answer >>
  3. The company I am receiving my pension plan from has just filed bankruptcy. Could ...

  4. What is the difference between an expense and a liability?

    Learn what liabilities and expenses are, which financial statements they are listed on, and the differences between liabilities ... Read Answer >>
  5. What does the operating cash flow ratio measure?

    Learn about the operating cash flow ratio, how the ratio is calculated and what it indicates about a company. Read Answer >>
  6. Can working capital be negative?

    Learn under what circumstances negative working capital can arise and what it means when working capital stays negative for ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center