Stellar Packaging Products is completing its budget process for the coming year. Robin Simmons mentions to Jesse Daniels that it would be advantageous to engage the managers in establishing their own budget targets in order to build morale among the team. Daniels indicated concern that managers would build “slack” into the budget.
1) What is budgetary “slack”?
ANSWER:
Budgetary slack is the amount of allowance ekpt intentially to meet the extra expenditures in a future cash flow. This budgetary slack can either underestimate the amount of income or revenue that will come in over a given amount of time, or overestimate the expenses that are to be paid out over the same time period.
2) How can budgetary “slack” be avoided if managers set their own budget targets?
ANSWER:
Managers will prepare their own budgets after considering the pros and cons of all the situations that impact the budget. Maintaining over slack of budget always leads to a great trouble in terms of cost factor. Hence, managers in most cases prepares the well planned budgets to determine the most approximate amounts to determine the budgeted amounts avoiding the slack amounts.
3) Is there an alternative way of budgeting to exclude “slack” altogether?
ANSWER:
The alternative way to exclude the budgetary slack is by good alignment between budgeting process and strategic business units to ensure that all line managers have the same perspective about achieving the organizational goals. Good implementation of budgetary control also plays a role in preventing budget slack.