Revenue Deficit: Definition & Example

KEY TAKEAWAYS

• A revenue deficit is when a company’s total revenue is less than its total expenditure. This indicates the company is spending more money than it can generate.
• The revenue deficit equation is easy to understand: it’s the difference between a company’s income and its expenses.

What Is a Revenue Deficit?

Revenue deficit is a term that refers to not enough revenue being generated to cover expenses. This could be an indication of negative cash flow, but more importantly, it shows the risk of inability to fund ongoing operations if it lasts. When you operate a business, you need to be able to pay for all your expenses, from salaries and rent, to utilities and raw materials.

A revenue deficit is one indication that something isn’t working as it should. A business can only have a negative cash flow for so long before it begins affecting the company’s ability to function on an operational level. Having too much operating expense and not enough revenue will eventually lead to a negative cash flow—this is what we call revenue deficit.

Revenue Deficit Formula

The revenue deficit formula is simple: it’s the negative difference between revenue and its total expenditures.

In this formula, Revenue refers to the amount of sales generated by the company. Expenses are the costs associated with running the business. If the calculation results in a negative number, it means that the company is generating a revenue deficit.

How Is Revenue Deficit Calculated?

You can calculate a revenue deficit by subtracting all expenditures from all revenues. If the end result is negative, then the company is operating with losses. In other words, the amount of money coming in from sales is not enough to cover all expenses. As such, you need to strive for additional income or reduce expenses to balance your loss of revenues. 

Advantages of Revenue Deficit

Reduction in revenue highlights areas for improvement in your business operations. Moreover, it can help you identify potential issues that may affect your business in the future. In doing so, revenue deficit helps you make better decisions related to business investment.

This can lead to revenue surplus, which can lead to growth or expansions. As a result, you stand to make better sales and improve basic operations. When you have more operating capital, your business has virtually endless potential.

Disadvantages of Revenue Deficit

Revenue deficits can have a variety of negative effects on a company. The most immediate effect is that the company might have to borrow money so the operations are not put on hold by possible cash shortages. This can lead to an increase in debt, which can be difficult to repay if the revenue deficit continues to exist.

Revenue deficits can lead to higher interest rates, which can make it more expensive for the company to borrow money in the future. Additionally, revenue deficits can also cause a decline in the company’s stock price, as investors may be concerned about the company’s ability to repay its debt.

As such, a revenue deficit can lead to unhealthy cash flow. This is one of the most critical issues every business owner should tackle. A revenue deficit may impact the company’s ability to obtain financing. It may cause loss of customers and put your operations in jeopardy.You might need to focus on a serious decrease in your spending plan. Review your actual budget and see if you have any budget surpluses. If necessary, put cost controls in place right away to limit spending.

Example of Revenue Deficit

There are several causes of revenue deficit. The most common cause is a decline in sales revenue. Another common cause of revenue deficit is an increase in government spending as the government implements new programs or expands existing ones. Revenue deficits can also be caused by natural disasters or economic recessions. These events can lead to a decline in sales revenue and an increase in government spending.

Let’s use an example: 

Company ABC generates $70,000 in sales each month. However, their operating expenses – such as salaries, raw materials, utilities and supplies – amount to $80,000. The resulting revenue deficit is $10,000.

Let’s say the company’s owner brings in an extra $5,000 in revenue each month by hiring an extra salesperson. Because the company now generates $75,000 in sales each month, their new revenue deficit is $5,000.

However, the company’s expenses have not changed, so the owner has to find ways to bring in more money or cut costs. For example, the owner could reduce marketing costs by decreasing the number of advertisements.

Here’s another example. If a company’s total revenue is $100 million and its total expenditures are $110 million, then it has a revenue deficit of $10 million.

Summary

Now that you know what a revenue deficit is, you can start to look for ways to prevent it. Remember, a revenue deficit can be caused by a decline in sales revenue, an increase in spending, or a natural disaster.

You can prevent a revenue deficit by ensuring that your company’s total revenue is greater than its total expenditure. You can also reduce your company’s debt by borrowing less money.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.