Shortfall

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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  3. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  4. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  5. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
Trading Center