Revenue DeficitExplained & Defined
What is a Revenue Deficit?
A company suffers from a Revenue Deficit when its actual income exceeds is less than its budgeted/forecasted income.
When the generated income for the current year is greater than its budgeted/projected income, it is classified as a revenue surplus, which is a counterpart of the revenue deficit.
Understanding Revenue Deficit
A company or government suffers from a revenue deficit when the actual amount of income is not enough to cover the actual business operating expenses.
It is the difference between the generated income vs. the projected income.
In case of a revenue deficit, the company borrows additional funds by entering into financing/loan contracts to cover its day-to-day operations.
Some effective solutions for a government suffering revenue deficit are cost minimization and increasing the tax rates.
While private companies can minimize their costs through variable costs like materials and labor costs, it will be difficult for companies to cut their expenses through fixed costs such as rent expenses due to their nature that cannot be altered.
The Disadvantage of Revenue Deficit
Suffering from a long-time revenue deficit directly affects the credit rating of a government or a company.
This situation might reflect how inefficient and ineffective the management is in dealing with its business operations.
This might also decrease its liquidity and solvency rate as the government or company will be forced to borrow additional funds just to cover its existing obligations.
When the government is in a revenue deficit situation, the savings allocated to other divisions or projects are being utilized just to cover government expenses.
Example of Revenue Deficit
The projection of Rose Flask Company for its 2023 revenue, expenses, and net income are $75 million, $55 million, and $20 million respectively.
At the end of the accounting period, the generated actual revenue is $65 million, while the incurred expenses are $60 million resulting in a $5 million net income.
Based on the projected and actual net income, the company suffers from a $15 million revenue deficit.
Both the projected revenue and expenses negatively affect the company’s current and future cash flows.
If the government suffers a deficit, the budget already allocated for other divisions like infrastructure or schools might be redirected to the division suffering a revenue deficit.
Doing cost analysis can be helpful, and a company might discover an effective approach to cost minimization that prevents revenue deficit.
For example, they may look for an alternative for the raw materials used that can provide the same quality of products or services or conduct more training for its personnel to increase their productivity rate, etc.
How Is Revenue Deficit Different From Fiscal Deficit?
A Revenue Deficit measures the difference between the generated actual income for the current year versus the projected income for the same year.
A fiscal deficit, on the other hand, refers to a government’s overspending that is sometimes unnecessary and beyond its consumption capacity.
It can also be because its expenditure is greater than its generated revenue.
How Is a Revenue Deficit Calculated?
A government or a company’s revenue deficit is computed by subtracting the revenue expenditure from revenue receipts.
How Can A Revenue Deficit Be Reduced?
Some solutions to prevent revue deficit is cost minimization or borrowing additional funds through loans.
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Boston University "CHAPTER 31: DEFICITS AND DEBT" Chapter 31. October 26, 2022