Revenue Shortfall

'Revenue Shortfall' is also termed as 'benefit shortfall'.  When the actual revenue is lower than the projected figure, it is called 'revenue shortfall'.

If a company's projected sales are $100 million a year, but the actual sales achieved is only $ 75 million, the revenue shortfall or benefit shortfall is down by 25%.

Both private and public enterprises suffer revenue shortfalls due to lack of proper planning or lack of strategy implementation, or other related factors.

If the company's planning process is prudently and realistically managed, such companies will include 'risk of  benefit' or revenue shortfall in 'risk assessment' and 'risk management'.

If the revenue shortfalls are huge and coincides with 'cost overruns' in a company, then the financial and other distress  will be severe and pronounced for the company.

The primary reason for revenue shortfalls is over estimation or non-pragmatic calculation due to lack of proper data, etc.

Revenue shortfall occurs mostly because human judgment is generally optimistic due to over confidence and insufficient consideration of information about outcomes.  Therefore, planners often tend to underestimate costs, completion time, and the risk of planned action, while tending to over estimate the benefits of those same actions.  This often leads to revenue shortfalls.

"Reference Class Forecasting" has been developed to reduce the risk benefit shortfalls, and cost overruns.  This theory was developed by Daniel Kahneman and Amos Trversky, but the methodology and data needed for this to implement was developed by Oxford Professor Bent Flyvbjerg and the COWI Consulting Group jointly. Kahneman was awarded the Nobel Prize in Economics for this effort.

Questions:

• What do you understand by `revenue shortfall` or `benefit shortfall`?
• What are the reasons for `revenue shortfall`?