What is budgetary slack?

Budgetary slack is when the people involved in creating a budget deliberately under-estimate the amount of revenue to be generated, or over-estimate the amount of expenses during the budget period. This allows them a much better chance of "making their numbers," which is particularly important for them if performance appraisals and bonuses are tied to the budget.

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.

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.

Budgetary slack interferes with proper corporate performance, because employees only have an incentive to meet their budget goals, which are set quite low. When there is budgetary slack for multiple consecutive years, a company may find that its overall performance has declined in comparison to that of more aggressive competititors who use stretch goals. Thus, budgetary slack can have a long-term negative impact on the profitability and competitive positioning of a business.

Related Topics

What are the objectives of budgeting?
What are the steps in preparing a budget?
What is a budget?
What is a budget variance?
What is participative budgeting?