Budgetary slack or sometimes it is referring to budgetary bias, is a common process where implementer intentionally underestimates revenue or overestimates expenses in the tight budget. Managers may attempt to create budgetary slack in three ways. Managers may deliberately underestimate the production or sales budget! s potential. For example, the sales budget for the month of July is RM 1 million. If the manager is able to achieve the target budget then the sales budget for the following month will be increases to RM 1. 5 million.
Manager creates budgetary slack by undervalue the budget so that the budget for August will be easier to achieve although they are able to hit the tight budget. Manager may also attempt to achieve slack by cost overestimation. They purposely used more than the budgeted expenditure so that the budget will be increases for the following months. After that they spend less than the budgets to shows that they have improve in their performance. For instance, the cost budget is set to be RM 1 million in January. Then the manager spends RM 1.
2 million in their expenditure so that the cost budget will be increase to RM 1. 2 million in February. Subsequently, they spend only RM 1. 1 million in March which is RM 0.
1 million lesser than February to prove that they have better performance. Moreover, manager may use up all the budgets to pretend that there is no slack in the recent budget. Manager may waste his extra cost budget on non-essential expenses. Let say the cost budget is RM 2 million for March, the manager will try to finish his allowance although he only spend RM 1. 8 million.
This may cause by the fear of the manager that the future budget will be reduces unless the allowance is fully utilise. If the budget being reduces, then this may make himself into difficulty to maintain or attain the reduced budget. Thus they spend money when it is not necessary to do so. Managers expect over estimations of difficulties happened too.
They attempt this so that the sales budget would be reduced and the cost budget would be increased for the subsequent months. This help in easing their job to reach the reduced budget and they would have higher allowances to spend on. For instance, the manager might only face two difficulties in his task in reality, but he overrate the difficulties to four so that the senior manager understand his situation and do some amendments on the tight budget. Senior manager in many ways can identify the distortion of the budgetary system.
The senior managers can try to compare the recent sales with other similar departments. For example, if the manager in Accounts Department is able to fully use or spend less in his cost budget, the manager in Finance Department should be able too and not over spend or overestimate. Besides, senior manager can make a review on pass trends to measure the sensibleness of budget. The comparison of current figures with previous record must consider the market growth and market share. For instance, if formerly the manager was able to reach the tight budget, he is supposing able to achieve the same budget at the same activity levels and working practices. Senior manager should also consider the environment changes.
Changes in government policy may have changes in business environment. Inflation, efficiency level, movement of interest rate as example, may affect sales volume. For instance, as the inflation rate increases, consumer might reduce their consumption, which then affected the quantity of sales. A proper meeting should be held between managers and senior manager. Senior manager may use their knowledge on the management style of managers to identify the area of slack introduced.
During the meeting, senior manager should discuss with budget holders about the sales reduced and how they determined to pick up their performances. This indirectly builds the awareness of those managers that distort the budgetary system. Senior manager can discover these manipulations by investigating the sales and spending behaviour of managers around the budget period end. The growing of complexity of business, as example will enhance the difficulty implicated in determining the interaction between different elements of business. Therefore it is depend on the behaviour of managers on how they take it. Senior manager may also attempt issue of transparency where all the departments coordinate and cooperate among themselves.
Each and every task of all the departments will be report to one another, so that their jobs are transparence and managers do not have the chance to slack the budget. For instance, if Account Department is doing task A, then the task will be transparent to all the departments. Zero based budgeting (ZBB) approach may be used where all expenditures must be justified each new period, as opposed to only explaining the amounts requested in excess of the previous period's funding. For example, if an organization used ZBB, each department would have to justify its funding every year. That is, funding would have a base at zero.
A department would have to show why its! funding efficiently helps the organization toward its goals. A detailed review of the complete draft budget needs to be performed by senior manager to ensure its rationality. Then compare the draft budget with external data, the information published by competitors and information from trade associations as examples. If the draft budget is not complement with the references, then there is a high possibility that managers attempt slack. Senior manager should do study on the background of managers too. Some managers are likely to introduce slack because they are not well trained regarding the system.
For instance, those managers who are fresh graduate and do not have the knowledge on the budgeting system of the organisation may be unable to plan the budget well. The burden of managers should also be review. Sometimes managers are loaded with too many tasks and lead them attempt budgetary slack. Senior manager may also study the budgetary system that he expected managers to achieve. Sometimes the budget might be too high and hardly to attain in the competitive market. The low actual results might be the best performance from managers.
For instance, the senior manager set the budget for RM 15 million for the year 2002. This high budget may be successful when economy rises but not during the economy crisis. Then the senior manager should improve in planning the system. In conclusion, the budgetary system is vital for every organisation for strategic planning.
Hence, the senior manager should have co-ordinate the managers correctly towards the organisation! s goals.