The terms budget deficit and balanced budget refer to an entity's expenditures compared to its revenues during a budget period. A company operating on a balanced budget has expenditures equal to its revenues, while a company operating on a deficit budget has expenditures exceeding its revenues. A budget surplus, in which revenues exceed expenditures, generally falls under the umbrella of a balanced budget.

When a company operates on a deficit budget, it must dip into reserves or obtain credit to pay the remaining expenditures not covered by its revenues. For this reason, a business cannot survive in the long run spending more than it makes; its reserves get depleted and its debt becomes insurmountable. In the short term, however, a company can benefit from operating on a deficit budget in several situations. Running a budget deficit can prevent a company from having to lay off workers during a slow period, it can help a company expand or buy out a competitor, and it can enable a startup to get off the ground.

During a down period in which revenues decline, a company has two choices regarding its budget. It can maintain a balanced budget by reducing expenses and bringing them in line with revenues, or it can keep expenses the same and run a budget deficit. If the business owner foresees the slow period will be ephemeral, he may elect to run a budget deficit instead of reducing expenses by laying off workers or closing plants. That way, when business picks up again, he has all his workers and operations in place, and he does not have to spend money to recruit new employees or open new plants.

Deficit budgets can also be useful when a company has the opportunity to open a new location or buy out a competitor. While these types of expansions can be great long-term opportunities, they come with short-term expenses that often cannot be covered by current revenues. Therefore, the company finances the expansion by running a budget deficit and using reserves or credit to pay for the cost of expanding. Ideally, once the expansion is complete, the increased revenues resulting from an expanded operation enable the company to pay off its debt or replenish its reserves.

When a new business opens, it usually takes several months or even years to build up revenues. Making money requires building a customer base, which is difficult to accomplish overnight. However, a company still has bills to pay, even before consistent revenues start coming in; for this reason, many startup operations rely on budget deficits to sustain themselves through the early months or years until revenues reach a level where expenses can be met under a balanced budget.

  1. Can state and local governments in the US run fiscal deficits?

    Discover why most state and local governments do not – or cannot – run fiscal deficits in the same manner as the U.S. federal ... Read Answer >>
  2. How long has the U.S. run fiscal deficits?

    Read about the history of deficit spending in the United States, dating back to 1789, and learn about then-Treasury of the ... Read Answer >>
  3. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms "current account deficit" and "trade deficit," and understand the differences ... Read Answer >>
  4. Should investors worry about the budget deficit?

    Understand the difference between government deficits and government debt, and learn why these figures can be significant ... Read Answer >>
  5. What happens to the US dollar during a trade deficit?

    Learn what happens to the U.S. dollar during trade deficits. Trade deficits happen when imports exceed exports leading foreigners ... Read Answer >>
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