What Is Budgetary Slack? (With 7 Steps for Preventing It)
By Indeed Editorial Team
Published 24 October 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Budgets are an important aspect of many projects, providing the monetary parameters for teams to conduct their responsibilities and complete their projects. A budget is essentially an estimation of how much money a team requires to complete a project, and it's possible for an organisation to overestimate the required budget, resulting in budget slack. Exploring how to prevent budget slack can help you plan projects efficiently and assign accurate budgets for project teams. In this article, we define budgetary slack, list its common causes and provide some steps on how to prevent an overestimation of budget requirements.
What is budgetary slack?
Budgetary slack is a financial term for a budget that is higher than necessary for its assigned project. This is usually because of an overestimation of budget requirements or an underestimation of revenue. For example, a software development firm is launching a new project to develop an application. They assign a budget of $200,000 to the team, but the team completes the project with $150,000. The budget has a slack of $50,000. This budget slack is essentially an inefficient allocation of resources, as the excess budget might have helped other projects and activities.
A budget slack might seem like a good thing, as an organisation has more money than it expects after project completion. The reason it's typically better to avoid budget slack, though, is that the excess money in the budget might have better use elsewhere in the business. Using the above example, the organisation might have used the excess of $50,000 for other projects or operational activities. While it's usually best to accurately plan a budget, some organisations may intentionally create a budget slack to ensure a team has the resources to complete a project before deadlines.
Causes of budget slack
Below, you can explore some typical causes of a budget slack:
A major cause of budget slack may be performance uncertainty. If an organisation has minimal data to analyse about previous projects and products, it might not be able to forecast performance accurately. This means the organisation doesn't clearly understand how much revenue a project may make. For example, a retail business is introducing a new product range. The product range is completely new, so the business has no prior sales or production performance to evaluate. When there is uncertainty about performance, an organisation might plan budgets conservatively, resulting in budget slack.
This typically refers to a lack of communication between departments, managers and senior managers. If an organisation is experiencing information asymmetry, its senior managers might not have all the information and data required to make accurate budget decisions. Senior managers might not have access to employee productivity and expense reports from previous projects, which can suggest future performances. Because of a lack of information, budget professionals are typically unable to plan budgets accurately and assign an appropriate budget.
Rewards from budget attainment
Depending on the organisation, it may offer its managers and employees bonuses for achieving budget goals. These goals are usually to complete a project without exceeding budget parameters. This can often encourage managers to overestimate budget requirements or underestimate expected revenue. For example, if a manager can receive a bonus for completing a project without overspending, they may plan a budget slack to ensure it's achievable. While employees and departments may achieve goals, it doesn't necessarily help the organisation. It might not be ideal for company culture either, as teams begin to prioritise personal rewards rather than company-wide goals.
Steps to preventing budget slack
Below, you can explore seven steps on how to prevent budget slack:
1. Choose a small specialised group to plan budgets
Choosing a small group of specialised budget planners can typically increase the accuracy of budgets. If you limit the decision-making process to a few senior managers, you can ensure they plan budgets to achieve company goals rather than individual goals. When limiting the decision-making process to only a few individuals, it can be an excellent idea to ensure you have effective communication channels. If the senior managers have insufficient access to data and information, they might not be able to plan accurate budgets, which is essentially information asymmetry.
2. Provide individual rewards for productivity
Rather than rewarding project teams and managers for achieving budgetary-based goals, it's often beneficial to reward them for their performance. For example, you might set goals for team members to conduct their duties with minimal defaults or errors to improve product quality. You may also set goals for completing duties before a given deadline. This can help you prevent managers from planning budget slacks. It can also help you foster an environment where employees receive recognition and rewards for productivity, leading to motivation and professionalism in the workplace.
3. Foster synergy in the workplace
Synergy typically refers to the collaborative efforts between two entities to achieve a common goal. If you foster synergy in the workplace, you can encourage employees to work together to achieve company goals rather than focusing on individual goals. This can mitigate selfish motives in the workplace and encourage productivity and teamwork. If you foster positive company culture and encourage teamwork, you can usually prevent managers and budget planners from creating budget slack to serve personal motives. You can typically foster a team-based company culture by prioritising on-boarding, providing employee benefits and ensuring a healthy working environment.
4. Improve communication channels
If budget slack is the result of poor communication in the workplace, it can be an excellent idea to evaluate the organisation's current communication channels and protocols. In some cases, budget planners might overestimate project expenses because they lack the analytical data to make informed decisions. If the organisation uses applications for managing and conducting activities such as sales, marketing, project management and business analytics, it can be an excellent idea to ensure integration between these applications. This can facilitate real-time data transfers between departments, allowing budget planners to access the necessary information to plan and forecast accurate budgets.
5. Allow time and resources for planning
In some instances, a manager may plan a budget slack because they lack the time and resources to conduct their duties properly. For example, if an organisation rushes budget planning procedures, a manager might not have time to analyse past project performances, team productivity, competitor budgets and market movements. Other resources besides time can also help managers plan budgets. For example, you can provide managers with training and development programs specific to planning accurate budgets. You might also provide new software and hardware, allowing managers to review data and communicate with other professionals efficiently, such as business analysers.
6. Analyse competitor budgets
If you're developing a product that's new to the business, you may lack performance and production data for making accurate budget estimations. For example, if you're developing a new type of machinery, there may be no information about production costs and sales performance because the organisation has never produced this product. While you might lack internal information, there may be data from other companies in your industry that produce similar products. If there is public access to data, such as production costs and revenue, you can use that data as a benchmark for the organisation's budget.
7. Gather substantial data
To improve the accuracy of budgets, it's usually beneficial to provide managers and budget planners with as much data and information as possible. There is typically a substantial amount of data that can indicate a project's potential cost and revenue. For example, employee productivity, task durations, sales performance, equipment maintenance, financial strategies and past financial statements may all provide data relevant to planning a new budget. If the organisation doesn't use data analytics software, you may consider implementing it in the workplace. This software usually automates many data extraction processes for efficient and accurate data analysis.
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