Determinants of Budgetary Slack and Its Impact on Organizational Performance

Abstract

Budgetary slack is a common phenomenon in corporate budget management, characterized by management intentionally underestimating revenues or overestimating costs during the budgeting process to create a financial cushion. Organizations need to be mindful of the potential negative consequences of excessive budgetary slack, which can undermine financial stability and transparency. This article aims to identify and analyze the key factors influencing budgetary slack and examine its impact on organizational performance. Using a review analysis approach, we investigated the determinants of budgetary slack and its effects on organizational outcomes. The analysis reveals that budgetary slack is influenced by factors at three distinct levels: the organizational level, the environmental level, and the individual level. While moderate budgetary slack can provide flexibility in uncertain environments, excessive slack ultimately impairs organizational performance through resource wastage and reduced managerial effort. Budgetary slack is a relatively complex phenomenon that requires careful management. Organizations must balance the need for operational flexibility with maintaining accountability and transparency. Further research could explore the underlying mechanisms contributing to the detrimental effects of budgetary slack, providing valuable insights for organizations to effectively manage it.