What is a Budget Deficit?

//What is a Budget Deficit?
What is a Budget Deficit? 2017-10-01T03:06:39+00:00

Definition: A budget deficit is a financial loss for during a period where expenses exceed revenues. This concept is often used in business but more commonly used to refer to governmental spending in excess of revenues collected.

What Does Budget Deficit Mean?

What is the definition of budget deficit? A deficit is a state of financial health that affects a large variety of businesses, organizations, and governments. These organizations include a wide specter of professionals that all must monitor their budgets: accountants, business owners, financial professionals, governmental figures, and many more. One of the most famous budget deficits is that of the United States government, but the most common is by ordinary businesses that are mismanaged or poorly executed.

Let’s look at an example.

Example

Alex is the founder of a small startup that creates widgets. In order to create his business, he had to purchase a factory, equipment, buildings, and financial software. Furthermore, he had to hire and pay employees, as well as their benefits. For the first year, Alex’s company creates and sells $700,000 worth of widgets, but finishes with $600,000 in costs, for a budget surplus of $100,000.

However, in his next year, the economy went into a recession, and he only sold $300,000 worth of widgets. His costs increased to $700,000. His company is now running a deficit of $400,000 (700,000-300,000).

This deficit of $400,000 continues for another two years, where his company now has accumulated losses of $100,000 – $1,200,000 = $1,100,000. This financial situation is perilous for any business to be in, let alone a startup, and can threaten the entire business model. A deficit, ultimately, is an unsustainable way to run a business. Eventually, the organization must make profit in order to pay its employees, obligations, and earn a profit for the owners.

Although a deficit is dangerous, a business owner has multiple ways to improve their firm’s financial health: aggressively cut costs, focus on the firm’s key business lines and market them, and also improve the efficiency of the line to both improve revenue and cut costs.

Summary Definition

Define Budget Deficits: Budget deficit means that actual expenses for a period exceeded actual revenues for that period.