Definition of Budgetary slack:
The inappropriate projection of lower revenues or higher expenses than is realistic or warranted during the financial planning process for a project or business. Budgetary slack is considered an unethical business practice when intentional because it tends to give the false impression that the eventual performance of the associated business or project has turned out better than planned.
Budgetary slack is a cushion created in a budget by management to increase the chances of the actual performance beating the budget. Budgetary slack can take one of two forms: an underestimate in the budget of the amount of income or revenue that will come in over a given amount of time, or an overestimate of the expenses that are to be paid out over the same time period.
Budgetary slack is generally frowned upon because the perception is that managers care more about making their numbers to keep their seats and to game the executive compensation system rather than to push the company's performance to its potential.
How to use Budgetary slack in a sentence?
- Budgetary slack is a built-in cushion in a budget that seeks to increase the chances of the actual performance being better than the budget.
- Budgetary slack is often viewed negatively as it is sometimes implemented so that managers can meet performance targets, ensuring bonuses or other benefits.
- There are two ways to accomplish budgetary slack: underestimate the amount of revenue or income to be generated or overestimate the amount of expenses that are to be incurred.
- Budgetary slack can be prevented by having a small group of managers create the budget, and disassociating meeting budget targets with performance.
- Budgetary slack can lead to mediocrity in a firm, resulting in a decrease in competitive advantage, lower revenues, and unhappy employees.
- There are times when budgetary slack is justified, for example when the economic outlook is uncertain, and managers are therefore more conservative.
Meaning of Budgetary slack & Budgetary slack Definition