Updated July 18, 2023
Definition of Budgetary Slack
Budgetary Slack is an underestimation of revenue of the organization or over-estimation of expenses of the organization deliberately by the managers or authorized persons so as to achieve higher results than the budgeted estimation to earn the bonus points in the eyes of top management which will be added in performance appraisal and also to earn the good amount of incentives.
Explanation
It is normally possible in case of a new product line where the previous budgets are not available. It is also possible when the top management have given more authorities to middle management. It is done where bonuses or performance appraisal are based on the targets achieved. The purpose of doing budgetary slack is to impress the top management and to earn additional bonuses. If the budgetary slack exists then it shows that there is lack in the management by the executives. If after preparation of budgets and before finalization of budgets, the budgetary estimations are analyzed by the executives and the top management then this problem would not exist.
Example of Budgetary Slack
ABC Ltd delegates the preparation of budgets to the concerned departmental managers. The approach of the organization is to do performance appraisal by achieving the budgeted targets and pressure for achieving the budgeted revenue is very high on the managers. The sales manager found it difficult to achieve the sales target as per the potential of ABC Ltd. of $ 500,000. So, the sales manager deliberately reduced the estimated revenue by $ 50,000 and showed the estimated revenue of $ 450,000, and the top management approved the budgets of all the respective managers without analyzing the figures or comparing the figures with the last year.
From the above example, it can be noticed that deliberate budgetary slack occurs due to heavy pressure or by taking target oriented performance appraisal measures.
Causes of Budgetary Slack
The causes of Budgetary Slack are provided and discussed as below-
- Budgetary slack is possible when the results are unexpected i.e. when the data is not properly available. It is possible where the product line is new and the previous budgets are not available.
- Budgetary slack occurs when there is a lack of information and knowledge to the management or the budget preparer.
- Deliberate budgetary slack occurs when the performance appraisals and bonuses are depending upon the targets achieved.
- Budgetary slack occurs when the top management does not analyze the budgets prepared by the managers and approve the budgets as it is prepared by the managers or officials.
- When the management and employees of the organizations are not loyal to the organization or when there is no job security that also causes the budgetary slack.
- Budgetary slack occurs when there is participative budget is prepared and there are too many people involved in preparing budgets.
Ways to Prevent Budgetary Slack
The ways of preventing from budgetary slacks are provided and discussed as below-
- The top management should employ honest and dedicated employees so as to prevent from budgetary slack.
- The authority to prepare budgets should be given to limited and knowledgeable personnel only so as to ensure the efficiency of budgets prepared.
- The policies of the organization should not be fully dedicated to performance evaluation and achieving the budgeted targets.
- Before approving the budgets, it should be properly evaluated by the top management.
- The budgets should be compared with industry performance.
- There should be job security amongst the employees so that the personnel does not have the need to do the deliberate budgetary slack.
Advantages of Budgetary Slack
Advantages of budgetary slack are provided and discussed as below-
- The better results are achieved with the help of budgetary slack. As the managers will try to do the best to meet the target of over and above budget.
- As the future is uncertain so it can be said that budgets are prepared on the conservative basis.
- If the cost is over-estimated in the budgets estimates it can be shifted to the future years.
- In case of new product line budgetary slack gives the flexibility to the management and budgets can be changed as per the market developments and business performance and operations.
- Goals can be easily achieved with the budgetary slack which increases the motivation amongst the lower level of management.
Disadvantages of Budgetary Slack
Disadvantages of budgetary slack are provided and discussed as below-
- With the budgetary slack the efficiency of the employees can be decreased as the targets can be achieved easily with underestimation of revenue.
- Budgetary slack leads to lowering of profits and increase of the cost as with the salary the incentives are also to be provided for achieving over and above the targets which increases the overall cost of the organization.
- The company’s overall growth gets reduced with the budgetary slack.
- The decision of investors’ can also be affected due to budgetary slack.
- Managements’ decision also gets affected due to budgetary slack as the management takes budget as base for planning and other future decisions.
Conclusion
Budgetary slack means underestimation of revenue and overestimation of expenses. It may be done deliberately by the organizations’ employees and officials so as to get the performance appraisals and incentives for achieving the budgets or higher than it. 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. Due to budgetary slack the organizational efficiency cannot be achieved and managements’ decision can also get wrong as the budgets are considered as base for future decisions. It can be reduced by motivating the employees and by less target-oriented performance appraisal approach.
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