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.
BREAKING DOWN Revenue Deficit
A revenue deficit, not to be confused with a fiscal deficit, is not indicative of a loss of revenues. It measures the difference between a projection and an actualization. Many governments, such as municipalities, operate with revenue deficits. However, if not remedied, the credit rating of the government can be adversely impacted. Consistently running a deficit implies that the government is unable to meet its current and future recurring obligations and that it is using savings allocated to other divisions of the economy for its expenditures. It also implies that the government 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.
Example of a Revenue Deficit
Company ABC projected its 2018 revenues to be $100 MM and expenditures to be $80MM (projected net income = $20MM). At the conclusion of the year, it was determined that the actual revenues were $85MM and expenditures were $83MM (realized net income = $2MM), resulting in a revenue deficit of $18 MM. 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.
Examples of Cost Cutting
A company can make improvements by cutting variable costs (e.g., material and labor costs). For example, 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. Fixed costs are more difficult to adjust because most are established by contracts, such as a building lease. By identifying and employing cost-cutting measures, the company can avoid revenue deficits in the future.