What Is Budgetary Slack.Budgetary slack refers to the intentional overestimation or underestimation of budgeted amounts by managers or employees to create a cushion or buffer in their budget. This cushion allows them to have flexibility in spending and may also provide a sense of security in case actual expenses exceed the budgeted amount.
For example, a manager might intentionally overestimate expenses to ensure that the budget is not exhausted, leaving some room for unexpected expenses. Alternatively, a manager might intentionally underestimate revenue to make it easier to meet budget targets or to make their performance look better.
However, budgetary slack can also have negative consequences. It can lead to inefficient use of resources, as managers may not be motivated to find ways to reduce costs if they have a budgetary cushion. It can also lead to a lack of transparency and accountability in financial reporting, which can be detrimental to the organization in the long term.
10 Reasons of Budgetary Slack;What Is Budgetary Slack.
Some cases of budget relaxation are intentional, others are not, and many more fall somewhere in between. Some examples clarify the differences:
Intentional budget failure
An intentional budget decrease can occur because a manager feels under pressure to “do their numbers,” often in response to previous quarters in which revenue fell below projections and, most importantly, they did not meet the expectations of the owners or the shareholders.
An easy way, if the unethical way to remedy the problem is for the manager to simply come up with a budget that overvalues expenses for the time period or deliberately hides likely sources of income. Since the budget was a bogus budget, the manager will now have little trouble exceeding it. On a large scale, the publication to analysts of quarterly revenue projections that the company’s internal auditors know the company may have already exceeded is one example.
Involuntary decrease in budget
Sometimes the involuntary lack of budgetary rigor may be due to insufficient internal controls. If there is insufficient data to make appropriate data-based sales and cost projections, managers may produce an unrealistic operating budget based on honest expectations that are little more than “the best assumptions”, or that are imperfectly based on previous quarterly budgets. that, for various reasons, do not reflect the income and costs of the coming quarters.
Budgetary slack that is partially intentional and partially involuntary.
This type of budgetary slack has two common causes: uncertainty of prospects in a new sales or cost environment and decentralized budgeting procedures. If, for example, the company is introducing a new product that is unlike any of those already on the market, who can tell what the sales will be? Even if the company has properly investigated the market, some uncertainty may persist.
The natural human tendency when such situations occur is to “play it safe” and make a sales projection unlikely to be embarrassingly optimistic. This is not exactly an intentional understatement, nor is it a totally innocent mistake. The other common situation involving a mix of intent and fallibility arises from a budget process that relies excessively on decentralized data entry.
