Definition and Example of Revenue Deficit

What Is a Revenue Deficit?

When realized net income is less than projected net income, a revenue deficit occurs. This happens when the actual amount of revenue and/or the actual amount of expenditures do not correspond with budgeted revenue and expenditures. This is the opposite of a revenue surplus, which occurs when the actual amount of net income exceeds the projected amount.

KEY TAKEAWAYS

• A revenue deficit does not mean loss of revenues has occurred—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.

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 income isn'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 government 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 affect 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 cover the shortage by borrowing.

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 2021 revenue 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 revenue was $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.

How Is Revenue Deficit Different From Fiscal Deficit?

A revenue deficit records the difference between the projected amount of income and what the income actually was. A fiscal deficit is when a government is spending beyond its means, or there is a shortfall in income compared with spending.

How Is a Revenue Deficit Calculated?

You can calculate a business or government's revenue deficit by taking the total revenue expenditure and subtracting it from total revenue receipts.

How Can A Revenue Deficit Be Reduced?

A business or government can remedy a revenue deficit by borrowing or raising money, or by cutting expenses or selling assets.

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