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Shortfall

Reviewed by Sweta | Updated on Oct 05, 2020

Catalogue

Introduction

A shortfall occurs due to inadequate funds in comparison to the financial obligations or liabilities due for payment. A shortfall refers to the short availability of funds. There can be situations of a temporary shortfall in funds due to internal or external factors affecting a business. At times, the shortfall may repeat after every working capital cycle on a persistent basis.

Understanding Shortfall

The management of a company should take note of the shortfall, analyse the reasons for it, and take action to meet the dues on time. In the short-term, a shortfall can be corrected through temporary loans from banks. However, if the nature of the shortfall is repetitive and persistent, the management should correct their financial practices.

In the case of a temporary shortfall, the same can be met by hedging strategies which help in mitigating the adverse impact of price fluctuations of commodities or products of the business. The permanent solutions to meet persistent shortfall or increased working capital requirement may include raising fresh equity, issue of long-term debt, or an increase in overdraft limit from banks.

In certain cases, a shortfall can occur due to the occurrence of an unpredictable situation, such as floods, typhoon, or earthquake. In such cases, a business needs to arrange for the short-term financial needs to meet its operating expenses or other debt servicing commitments occurring monthly.

From a consumer’s perspective, a shortfall in payments or non-availability of cash in hand can be met with the help of a credit card. The consumer can purchase the goods by paying through a credit card and also gets time to arrange for the funds during the credit period under the card.

Similarly, shortfalls may also occur in the case of loan EMI payments from consumers. Here, the consumer needs to pre-arrange the funds or pay the penalty for late payment.

Conclusion

A shortfall can also occur at the government level, where it is unable to raise the budgeted revenues in the form of taxes. The shortfall can be met through the identification of other potential revenue sources.

The government may also raise funds through disinvestment of its stake in a public sector undertaking. In general, as a financial strategy, an individual or organisation must monitor its financial resources and plan for funds in the case of any shortfall.

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