Calculations for Budget Funding Shortfalls

by Steve Brachmann

Every organization will experience a budgeting shortfall at some point. The best way to prepare for these shortfalls is to calculate your budget well in advance of the fiscal year and determine how best to address those shortfalls while maintaining the most important organizational resources. Although a budget shortfall can be calculated by subtracting total expenses from total revenue, estimates must often be used to forecast costs that may change in the future.

Drafting a Budget

Calculating your budget is the first step towards determining whether or not your business will experience a budget shortfall. A budget is calculated at the beginning of a fiscal year and includes all applicable expenditures as well as income. Add all of your planned expenditures for the upcoming year to determine the amount of money your business will need to operate. For larger businesses, it may be easier to split expenditures into different categories. Subtract your planned total expenditures from your expected income to determine whether or not your business will experience a shortfall. Exact figures usually must be estimated as prices and income may change slightly throughout the year from the budget forecast.

Baseline Budgeting

Baseline budgeting is a common form of budgeting used by businesses and various levels of government. Baseline budgeting requires an organization to estimate the cost of providing the same level of services or goods over the subsequent year that were offered during the previous fiscal year. For state governments with complicated tax codes or formulas for offering housing or educational assistance, this eliminates the need to determine the cost of services provided for each taxpayer, which would be very time consuming.

Preparing for Shortfalls

Preparing your business or organization for a shortfall is crucial for maintaining the trust of your organization's clients who utilize your goods or services. Many public organizations, such as schools, have minimum funding guarantee policies in place that allow them to claim more public funding to reduce the shortfall. In years during which organizations experience a budget surplus, future budget shortfalls can be prevented by investing that surplus into a savings account or other low-risk form of investment.

Tough Decisions

When a budget shortfall cannot be covered by internal savings or external funding, operations must be cut down to save money. Deciding which services or goods to scale back on can be very difficult, especially for organizations that have a large number of stakeholders, like governments. For example, some estimates for the Texas budget during the 2012 to 2013 fiscal year forecast a budget shortfall of $27 billion. Legislative budgets that have been proposed to cut this shortfall recommend funding reductions of $5 billion in state education, closing five state community colleges and considerations of whether or not to opt out of the federal Medicaid program.

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