# Financial Shortfall: Definition, Causes, Solutions, and Types

![Shortfall](https://www.investopedia.com/thmb/OTh-_CouYiFMuOMs4dZjvUKpcF4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Shortfall_updated_3-2_final-7a228cb988e54b1eada3b4e35b013b86.png)

*— Investopedia / Michela Buttignol*

## What Is a Shortfall?

A shortfall is an amount by which a financial obligation or liability exceeds the amount of cash that is available to pay it. It can be temporary or persistent. If persistent, it can be due to inadequate financial management. A shortfall, while a significant concern, is usually quickly remedied with [short-term loans](https://www.investopedia.com/terms/s/shorttermdebt.asp), [equity](https://www.investopedia.com/terms/e/equity.asp) injections, and better cash management practices.

### Key Takeaways

*   Shortfalls occur when financial obligations exceed available cash, potentially indicating poor financial management if persistent.
*   Both individuals and businesses can face shortfalls, which may stem from unexpected events or long-term financial issues.
*   Short-term remedies for shortfalls include loans and equity injections, while long-term solutions may require structural financial changes.
*   Efficient hedging strategies can mitigate shortfall risk by protecting against adverse price movements.
*   Real-world examples, such as pension fund shortfalls, highlight the importance of addressing financial obligations proactively to meet obligations and avoid exacerbating budgetary issues.

## How Shortfalls Affect Financial Stability

A shortfall can occur in the present time or be projected for the future. A shortfall applies to any situation where the level of funds required to meet an obligation is not available. Shortfalls can occur in the business arena as well as for individuals. Temporary shortfalls often occur in response to an unexpected event, while long-term shortfalls may be related to overall business operations.

Consumers all face shortfalls when they do not have enough funds to pay for things like groceries or bills. Credit or debit card [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) protection is one way to deal with short-term consumer shortfalls.

## Exploring Different Types of Financial Shortfalls

### Temporary Shortfalls

A temporary shortfall for a small company may arise when an equipment failure at its production facility impedes output and results in lower revenues in a particular month. In this case, the company may resort to short-term borrowing to meet [payroll](https://www.investopedia.com/terms/p/payroll.asp) and other operating expenses. Often, once the issue that led to the shortfall is corrected, business operations return to normal, and the shortfall is no longer a concern.

In the consumer market, an [escrow](https://www.investopedia.com/terms/e/escrow.asp) shortfall may occur when the amount of funds deposited into the escrow account, often paid along with a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) payment, fail to meet the obligations associated with the escrow funds, such as property taxes or homeowner’s insurance. In these cases, consumers are notified of the shortfall and may be presented with the option of paying the entire amount at once or by increasing the monthly charge associated with their mortgage payment to cover the difference.

### Long-Term Shortfalls

A typical long-term shortfall is the [pension](https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp) shortfall faced by many organizations whose pension obligations exceed the returns they can generate from their pension assets. This situation generally occurs when returns from equity markets are well below average.

If a retirement fund is underfunded, it's crucial to fix the shortfall. If the contribution rate is not raised, it can result in an increase in the shortfall in the pension account that may be difficult to remedy later. To address a shortfall, officials may suggest solutions like new taxes or reallocating funds to sustain the fund.

## Strategies to Mitigate Shortfall Risks

Shortfall risk can be mitigated using efficient [hedging strategies](https://www.investopedia.com/terms/h/hedging-transaction.asp), which aim to offer protection from adverse price movements. For instance, resource companies often sell future output in forward markets if they expect large future [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp). Such hedging helps to ensure that the finances required for a future financial obligation are available.

### Real World Example

As of July 2020, the New Jersey pension fund for public workers is severely underfunded. The fund has approximately $35 billion in liabilities and a little over $23 billion in assets to cover the obligations, which is a shortfall of approximately 34%. The pension covers over 295,000 active and retired workers.

The pension is viewed as poorly managed, and despite more contributions, it still has a shortfall. Reasons for the shortfall include a reduction in the rate of return and increased member life expectancy. That being said, actuaries claim that the state is not nearly contributing enough to close the shortfall.

## The Bottom Line

Financial shortfalls, which can be temporary or long-term, can significantly impact a company's or individual's financial stability and require prompt attention. Shortfall resolutions involve strategies like short-term loans, equity injections, and improved cash management practices. In addition, hedging strategies can effectively mitigate shortfall risks, particularly for businesses anticipating future financial obligations. Businesses and individuals should continuously monitor their financial circumstances and develop proactive strategies to prevent shortfalls.  

> **Article Sources**
>
> 1.  State of New Jersey. "[Public Employees Retirement System of New Jersey](https://www.state.nj.us/treasury/pensions/documents/financial/actuarial2019/2019pers.pdf)," Page 5. Accessed Nov. 30, 2020.