The controller's cushion refers to the deliberate overstatement of expenses early in the year, so that the controller has a favorable expense buffer that can be drawn down later in the year. This cushion is usually created for estimated expenses, such as:
- Accrued bonuses
- Bad debt reserve
- Obsolete inventory reserve
- Warranty reserve
If the actual financial results later in the year begin to decline, the controller then adjusts these expense reserves downward, thereby reducing expenses and resulting in an overall improvement in financial results. The use of a cushion is not good practice, since it tinkers with the actual results of a business. Still, the concept is commonly employed in organizations where investors value extremely consistent earnings levels.