Definition:
Budgetary slack is the intentional overestimation of expenses or underestimation of revenue in a budget. It’s a practice sometimes used by managers to create a cushion or safety margin in the budget, making it easier to meet or exceed the budget targets.
Key points about budgetary slack:
- Overestimation/underestimation: Budgetary slack involves intentionally overestimating expenses or underestimating revenue.
- Safety margin: It creates a cushion or safety margin in the budget, making it easier to meet or exceed the budget targets.
- Performance evaluation: Budgetary slack can make it easier for managers to achieve their performance goals.
- Misallocation of resources: However, excessive budgetary slack can lead to inefficient resource allocation and reduced performance.
Why is budgetary slack used?
- Uncertainty: Managers may use budgetary slack to account for uncertainty and potential risks.
- Protection: It can provide a buffer against unexpected expenses or revenue shortfalls.
- Performance incentives: Budgetary slack can be used as a performance incentive, as managers may be rewarded for exceeding budget targets.
However, excessive budgetary slack can have negative consequences, such as inefficient resource allocation, reduced motivation, and decreased accountability.
In essence, budgetary slack is the intentional overestimation of expenses or underestimation of revenue in a budget, and it can be a useful tool for managing uncertainty and achieving performance goals. However, excessive budgetary slack can have negative consequences.
