The managers may be forced to deal with this lack of resources at the outset of the project, or may face cuts during the project efforts. The budgetary slack allows the managers to compensate for insufficient resources while still delivering at least some aspects of the project.
Living in Houston, Gerald Hanks has been a writer since He has contributed to several special-interest national publications. Before starting his writing career, Gerald was a web programmer and database developer for 12 years. By Gerald Hanks. Budgetary slack is possible where there is new line of product or where there is less analysis of budget by the top management of the organization.
Budgetary slack shows that top management also lacks in the controls. It also indicates that the employees are dishonest with the organization and this might be because of no job security or the rigid policies by top management or heavy target-oriented pressure to the employees by the top management. It can be reduced by motivating the employees and by less target-oriented performance appraisal approach.
This is a guide to Budgetary Slack. Here we also discuss the definition and causes of budgetary slack along with advantages and disadvantages. You may also have a look at the following articles to learn more —. Underlying it is the same motive: to allow the company's next report to show that revenues "have exceeded expectations. Unintentional budgetary slack can sometimes result from inadequate internal controls. If there is insufficient data to make appropriate data-based cost and sales projections , managers may produce an unrealistic operating budget based on honest expectations that are hardly more than "best guesses," or are imperfectly based on past quarter budgets that for any number of reasons do not reflect revenue and costs for coming quarters.
This can happen, for instance, if the company's internal controls do not reflect accelerating sales from a new product. If instead of noting the sales acceleration of the new product during the previous quarter and taking its continued sales momentum into account, the manager simply notes the overall sales figure for the quarter, then applies that same number to the coming quarter, the result will be an unintentional underestimation of sales and profits.
This kind of budgetary slack has two common causes: outlook uncertainty in a new sales or cost environment and decentralized budgeting procedures. If, for example, the company is introducing a new product unlike any products now on the market, who is to say what the sales will be? Even if the company has adequately researched the market, some uncertainty may remain.
The natural human tendency when this kind of situation occurs is to "play it safe" and to make a sales projection unlikely to be embarrassingly optimistic. This isn't exactly an intentional underestimation, nor is it an entirely innocent mistake. Budgetary slack may also occur when there is considerable uncertainty about the results to be expected in a future period. Managers tend to be more conservative when creating budgets under such circumstances. This is particularly common when creating a budget for an entirely new product line , where there is no historical record of possible results to rely upon.
Budgetary slack is most common when a company uses participative budgeting , since this form of budgeting involves the participation of a large number of employees , which gives more people a chance to introduce budgetary slack into the budget. Another source of budgetary slack is when senior management wants to report to the investment community that the business is routinely beating internal budget expectations.
This cause is less likely, since outside analysts judge a company's performance in relation to the results of its competitors, not its budget.
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