What is a Revenue Deficit?
A revenue deficit occurs when realized net income is less than the projected net income. This happens when the actual amount of revenues and/or the actual amount of expenditures do not correspond with budgeted revenues and expenditures. This is the opposite of a revenue surplus, which occurs when the actual amount of net income exceeds the projected amount.
[Important: A revenue deficit is not indicative of a loss of revenues.]
Understanding Revenue Deficit
A revenue deficit, not to be confused with a fiscal deficit, measures the difference between the projected amount of income and the actual amount of income. If a business or government has a revenue deficit that means its earnings aren't enough to cover its basic operations. When that happens, it may make up for the revenue it needs to cover by borrowing money or selling existing assets.
To remedy a revenue deficit, a goverment can choose to raise taxes or cut expenses. Similarly, a company with a revenue deficit can make improvements by cutting variable costs, such as materials and labor. Fixed costs are more difficult to adjust because most are established by contracts, such as a building lease.
Disadvantages of Revenue Deficit
If not remedied a revenue deficit could adversely impact the credit rating of a government or business. That's because consistently running a deficit could imply that a government is unable to meet its current and future recurring obligations. It also implies that the government or business will have to disinvest or substitute the shortage with debt.
Running a revenue deficit places many planned government expenditures in jeopardy as there are not enough funds to cover the costs. Often, a government with a revenue deficit is using savings allocated to other divisions of the economy for its expenditures.
Example of Revenue Deficit
Company ABC projected its 2018 revenues to be $100 million and expenditures to be $80 million for a projected net income of $20 million. At the end of the year, the company found that its actual revenues were $85 million, and its expenditures were $83 million, for a realized net income of $2 million. That resulted in a revenue deficit of $18 million.
The projections for both the expenditures and revenues were off, which could negatively affect future operations and cash flows. If the subject of this example were a government, funding for required public expenditures, such as for infrastructure and schools, could be seriously compromised.
By identifying and employing cost-cutting measures, the company can avoid revenue deficits in the future. It can explore more cost-efficient ways of doing business, such as finding suppliers who can supply materials at a lower cost or by vertically integrating processes along its supply chain. The company can also invest in training its workforce to be more productive.
- A revenue deficit does not mean loss of revenues has occured—it's simply measuring the difference between a projected amount of income and the actual amount of income.
- If a business or government has a revenue deficit that means its earnings aren't enough to cover its basic operations.
- Organizations can avoid future revenue deficits by identifying and implementing cost-cutting measures.