What is a Funding Gap?
A funding gap refers to the shortfall in money required to support the ongoing operations or future growth of a business or project that isn’t covered by cash, equity, or debt. These gaps can be filled through venture capital, angel investments, equity sales, or loans.
The term is frequently used during the early stages of research, product development, and marketing, especially for startups. Industries like pharmaceuticals and technology, which depend heavily on research and development, often experience funding gaps.
Key points:
- A funding gap arises when there isn’t enough capital to support operations or development.
- Early-stage companies face funding gaps due to narrow profit margins and difficulty in forecasting expenses.
- Solutions include securing investors or raising additional capital via equity or debt financing.
Understanding Funding Gap
The ease with which a young company secures funding depends on several factors, such as the business model’s viability, industry barriers, and overall market and economic conditions. When stock markets are strong, venture capital investors are more willing to fund startups, often lowering their eligibility criteria.
At early stages, funding gaps are common since a company may not fully understand its operating costs until it matures, and initial revenues are usually minimal.
In education, funding gaps can also occur in schools serving low-income and minority students.
Examples of Funding Gaps
Organisations can experience funding gaps for various reasons. Shortfalls may arise from expenses tied to research and development, such as bringing a prototype to production or advancing an experimental drug through clinical trials and approvals—costs that may exceed available funds.
When facing funding gaps, businesses often seek additional investors or financial solutions to secure the necessary capital. The goal is to sustain operations until revenue flows are sufficient to cover expenses.
Government agencies can encounter funding gaps when their budget doesn’t cover essential operations. For schools, this could mean cutting classes or staff. Government programs may also cease operations until they secure enough resources. When multiple federal entities face funding gaps, it can lead to a government funding shortfall. Sometimes, it’s not a lack of funds but a restriction in authority to allocate or spend them.
For example, national park closures during government funding shortfalls are common. Defence programs, like new military equipment development, are also vulnerable to shortfalls, causing delays or cancellations until funding is restored.
The Funding Gap in Australia’s Education Sector
The concept of a funding gap is not limited to the business world; it’s a significant issue in Australia’s education sector. Over the years, many Australian schools, particularly in regional and disadvantaged areas, have faced funding gaps that limit their ability to provide high-quality education to all students. The Schooling Resource Standard (SRS) also helps determine how much funding a school in Australia must receive from the federal government or the state and territorial governments.
In November 2023, the Australian Education Union released a new report discussing SRS projections for 2023 to 2028. It identified just 1.3 per cent of Aussie public schools as meeting the SRS levels for 2023, with a deficit of $4.5 billion. In contrast, private schools were 98 per cent above their SRS with $800m excess, indicating a massive funding gap, which may be an issue considering a private school also earns through tuition fees.
The gaps are evident when dissected further by state or territory – in Tasmania, for example, public schools were at $118m below SRS, but five private schools surpassed their SRS by an extra $7m total. All public schools in the ACT met the SRS level. Sadly, both public and private schools in the NT were underfunded, the report added.
The shortfall of funding for public schools in any Australian jurisdiction also affected the attendance numbers. When it came to Year 1 to 10 attendance for schools in major cities, the average number stood at 89.6 per cent but remote-area schools were at 81.1 per cent and 66.1 per cent in very remote areas. How about Year 12 graduates? The report tagged the certificate being presented to just 82 per cent of students in major cities against 73 per cent of students from remote areas and 51 per cent for students from very remote locations. When it came to retention rates, the AEU stated that one in five Aussie students never made it to Year 12.
Evaluators predict that the SRS gap might worsen over the 2023-2028 period, to the tune of $6.2 billion to $6.5 billion a year, unless the national government created a partnership designed to generate ample funding for all schools in Australia to reach 100 per cent SRS level. The AEU also recommended that a state or territorial government set a minimum 75 per cent of SRS funding, but the four-per cent capital depreciation and allowance charge be removed.
Conclusion
A funding gap occurs when a business, project, or organisation lacks the necessary capital to sustain operations or development. This shortfall often arises in early-stage companies, startups, or industries like technology and pharmaceuticals, where initial revenues are minimal and costs are unpredictable. Solutions to funding gaps include raising capital through equity, loans, or securing investors. In sectors such as education, funding gaps can severely affect services, as seen in Australia’s public schools, which face significant shortfalls compared to private institutions. Addressing these gaps is essential for continued growth and development.
DISCLAIMER: This article is for informational purposes only and does not supersede official financial advice. BARTERCARD does not have business relationships with any companies mentioned.
