What is a 'Shortfall'

A shortfall is 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.

BREAKING DOWN 'Shortfall'

A shortfall can refer to a current situation as well as one predicted for the future. A shortfall applies to any situation where the amount of funds required to meet an obligation are not available. Shortfalls can occur in the business arena as well as to individuals. Temporary shortfalls often occur in response to an unexpected event, while long-term shortfalls may be related to overall business operations.

Temporary Shortfalls

A temporary shortfall for a small company may arise when an equipment failure at its production facility impedes output and results in lower revenues in a particular month. In this case, the company may resort to short-term borrowing to meet payroll and other operating expenses. Often, once the issue that led to the shortfall is corrected, business operations return to normal, and the shortfall is no longer a concern.

In the consumer market, an escrow shortfall may occur when the amount of funds deposited into the escrow account, often paid along with a mortgage payment, do not meet the obligations associated with the escrow funds, such as property taxes or homeowner’s insurance. In these cases, consumers are notified of the shortfall and may be presented with the option of paying the entire amount at once or by increasing the monthly charge associated with their mortgage payment to cover the difference.

Long-Term Shortfalls

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.

For example, in 2015, the state of New Jersey’s pension fund, a defined benefit retirement plan, was considered underfunded. If the contribution rate was not raised, it could result in a shortfall in the pension account. In response to the shortfall threat, government officials propose possible solutions, such as raising revenue through new taxes or redirecting funds from cuts in other areas to attempt to bring the fund up to a sustainable level.

Shortfall Risk Mitigation

Shortfall risk can be mitigated using 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 the future. Such hedging helps to ensure that the finances required for a future financial obligation are available.

RELATED TERMS
  1. Pension Shortfall

    A pension shortfall occurs when a company with a defined benefit ...
  2. Implementation Shortfall

    An implementation shortfall is the difference between the price ...
  3. Value Averaging

    Value averaging is an investing strategy that works like dollar ...
  4. Canadian Investor Protection Fund ...

    A Canadian not-for-profit organization set up by the investment ...
  5. Conditional Value At Risk - CVaR

    A risk assessment technique often used to reduce the probability ...
  6. Overfunded Pension Plan

    A company retirement plan that has more assets than liabilities. ...
Related Articles
  1. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
  2. Financial Advisor

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  3. Retirement

    3 Reasons To Be Flexible When Investing For Retirement

    Retirement investing can't be something you set and forget. If you aren't flexible, you could end up with a savings shortfall, a tax hit and high fees.
  4. Retirement

    Earn Your Own Paycheck With Retirement Cash Flow

    Retirement planning won't get you very far without plans to manage your cash flow. So turn retirement income into monthly paychecks with these steps.
  5. Retirement

    Will the Social Security Cap Increase Help It Last Longer?

    The Social Security cap increase will be 7% in 2017, but even that may not be enough to keep Social Security from running out of funds.
  6. Retirement

    Can President Trump 'Fix' Social Security?

    Donald Trump’s plan to replenish Social Security goes in a very new direction.
  7. Financial Advisor

    How Capital Gains Tax Works on Pension Funds

    Here's why capital gains tax does not affect the assets in pension funds.
  8. Retirement

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  9. Financial Advisor

    Retirement Bliss? Not So fast: When Savings Lag

    Most people aren't saving enough for retirement. Here are some tips savers and financial advisors can use to change that.
  10. Retirement

    Is Your Defined-Benefit Pension Plan Safe?

    Your plan may not last in a rocky market. Find out whether your savings will be affected.
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center