When expenses outweigh revenues, imports outweigh exports, or liabilities outweigh assets, a deficit is produced. A deficit is the counterpart of a surplus and is defined as a loss or shortfall. When a government, organization, or an individual spends more than it earns in a specific period, typically a year, a deficit occurs.
Deficits aren’t necessarily intentional or indicative of a government or corporation in financial difficulty. Companies may purposefully run budget deficits in order to maximize future profits potential, like keeping personnel in slow months to maintain a sufficient workforce during busier periods. In addition, some governments run deficits in order to fund significant public projects or sustain citizen programs.
A government may choose to run a deficit by reducing revenue sources such as taxes while keeping or even increasing spending during a recession.
Deficits, on the other hand, come with risks. Running a deficit can have negative consequences for governments, such as reduced economic growth rates or currency depreciation. Running a deficit for an extended period of time can diminish a company’s share value or possibly put it out of business.
Cause of deficits:
- Administrative and productioncosts have exceeded expectations.
- Returns on products are higher than expected.
- The number of units sold is insufficient to cover fixed costs.
- The prices of productsare excessively low.
- The rate of scrap and shrinkage is higher than expected.