Question

Susie Sampson was recently promoted to be a manager of a department where she previously had not worked. When she met with her team, she learned that they liked to put a lot of “slack” in their budget numbers to ensure success, which would translate to bonus For example, to determine their costs, they would use the three least efficient months of the previous year to calculate their costs. She is not comfortable with their process and has never seen it used in previous departments.

1. Can Susie justify this built-in budgetary slack?
2. Do you believe this approach is ethical?
3. How will her department members feel if she changes their approach to budgeting?
4. If you were in Susie’s position, what would you do?

Answer 1

1.Budgetary slack means keeping the budget revenue figures low or expense figures high, so that actuals can easily surpass the revenue or look like under-control expenses--- that too ,when the figures are linked to the manager's incentives, there are numerous possibilities for slacks to be introduced--- where-in the managers-responsible for teh budgeted performance , tend to take the average of teh lowest figures possible for income & revenues and the converse for expenses , so that the actuals can outperform & the managers pocket hefty incentives.

If not done for money,these are done , to show efficiency and to increase their credit-ratings , in the eyes of the superiors--- to count for promotions .

It is obvious that Susie cannot justify this built-in budgetary slack, as this constant under-performance , year-on -year , will certainly affect the long-run future of the company, without the bosses/shareholders , continuously believing , what is not true --the myth , bound to collapse, one fine morning.

Setting easily achievable targets for revenues , will project the company's incapability to push itself forward , which will ultimately reflect in collective investors' preference of other companies , in the former's place.

Also , expense budgets based on these untrue revenues ,will lead to growth deficiencies also.

So, slacks in budgets cannot be justified at any cost.

2.Do you believe this approach is ethical?

Introducing slacks in budgets , knowingly , without any justifications, just for the sake of bonuses , is clearly unethical, misleading all the stakeholders , into believing what is not actualy the case.

By under-estimating revenues and over-estimating expenses,bench-mark figures likethe earnings per share will be affected, misleading the market also.

Tax expenses & tax paid will be erroneously calculated.

Such is the vast ramifications , that including slacks in budgets , are to be termed unethical only.

3.Her department will certainly not like Susie , operating without salcks, as they have all-along ,got used to soft & easily-attainable targets---- both to make more money & to prove their mettle, with those targets.

So, she is bound to have opposition from most of them, who all have benefitted financially and otherwise(like earning the favor of the management, for having achieved /surpaseed budgeted targets), in previous budgets.

4.Susie should first impress upon all of them to be true or can even try some rewards for persons who combine honesty with budget achievements.

Secondly, she should delink those who create budgets & thos ewho impelment them , so that there will not be any my-figure syndrome, which leads to should-make-it -come- true mentality

Thirdly, the above who create the budgets should be very few in number , so that they keep secrets , to themselves, & motivate the larger group, at the right time.

Fouthly,truth, perseverance & commitmtnt for the cause of the company , must be given more weightage , than achieveing numbers belonging to the budget.

Last but not the least, numbers should be just to form a basis & all the employees should be given some range of variance /allowance , to meet them, so that there is no undue pressure , just for the sake of incentives--- which lures them to lose values, at a freak moment of human weakness.To create that confidence in the minds of the employees, is certainly the responsibility of the management,so as to , totally weed out such unethical behaviour.