DEFINITION of 'Shortfall'

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.


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.

  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Implementation Shortfall

    In trading terms, the difference between the prevailing price ...
  3. Interest Shortfall

    Any interest that has not been paid after the loan payments have ...
  4. Hedge Ratio

    1. A ratio comparing the value of a position protected via a ...
  5. Delta Hedging

    An options strategy that aims to reduce (hedge) the risk associated ...
  6. Pension Shortfall

    A situation in which a company offering employees a defined benefit ...
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