Question

Please briefly discuss what is “budgetary slack.”

Answer 1

When the budgeted revenue of any business organisation is either under estimated or over estimated, it is called budgetary slack. It may also occur in case of uncertainty about the expected results. It is also called participative budgeting, as this form of budgeting involves the participation of a large number of employees. It is created by management of a company to increase the probability of actual performance exceeding the budget performance. 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 competitors who use stretch goals. Thus, budgetary slack can have a long-term negative impact on the profitability and competitive positioning of a business.