Budgetary Slack: What the Latest Research Reveals About Forecast Accuracy and Organizational Performance

Budgeting plays a central role in how organizations plan, allocate resources, and evaluate performance. Yet one persistent challenge continues to distort forecasts and weaken strategic execution: budgetary slack.

Budgetary slack occurs when managers deliberately underestimate revenue or overestimate costs to create a financial cushion. While widely recognized in management accounting, recent research provides deeper clarity on why slack occurs and how it affects organizational performance.

A 2025 review by Zhuang, Abu Bakar, and Alias offers one of the most structured and comprehensive analyses of this phenomenon to date. Their paper synthesizes decades of empirical research and identifies three distinct levels of determinants influencing budgetary slack.

What Is Budgetary Slack?

Budgetary slack often arises from negotiation during the budgeting process. Managers may adjust assumptions to create easier targets, especially when budgets influence compensation, promotions, or performance evaluations.

Slack typically appears in two forms:

Revenue slack: underestimating expected revenue.
Cost slack: overstating required resources or expenses.

Although traditionally viewed as dysfunctional or even unethical, research also recognizes that slack may provide strategic flexibility in unpredictable environments. The key question is not whether slack exists, but whether it is at a reasonable level.

The Three Levels of Determinants of Budgetary Slack

One of the key contributions of Zhuang et al. (2025) is a clear three-layer framework explaining what drives slack. Budgetary slack is influenced by determinants at the:

Organizational level
Environmental level
Individual level

This framework helps shift the discussion from “bad managers” to a more realistic view of how systems, context, and human behaviour interact in budgeting.

1. Organizational-Level Factors

Organizational-level factors include structural and procedural elements within the firm, particularly those linked to the budgeting process and performance evaluation. Key drivers include:

Information asymmetry between managers and superiors, where managers hold more detailed knowledge of operations and can influence assumptions.
Participative budgeting, which can increase slack if managers participate in setting their own targets and rewards are tied to “meeting budget.”
Budget emphasis, where performance evaluations rely heavily on whether managers hit budget targets, encouraging conservative forecasting.
Organizational commitment, which tends to reduce slack because employees prioritize organizational goals over personal gain.

When budgets are closely tied to rewards and career outcomes, creating slack becomes a rational response, not an anomaly. The design of the control system itself can unintentionally incentivize sandbagging.

2. Environmental-Level Factors

External uncertainty also plays a significant role in slack creation. Organizations operating in dynamic environments tend to introduce more slack as a protective buffer. Typical sources of uncertainty include:

Intense or volatile market competition
Changing customer behaviour and demand patterns
Supplier disruptions and cost volatility
Regulatory changes and policy shifts

Research indicates that higher uncertainty increases the likelihood of slack, and it also makes it harder to distinguish between honest forecast error and deliberate padding. From a contingency-theory perspective, some slack can be seen as a buffer that helps organizations adapt to a shifting environment.

3. Individual-Level Factors

Budgeting is not purely a numerical exercise; it is deeply influenced by human behaviour. Zhuang et al. (2025) highlight that individual-level factors also drive slack formation, including:

Personality traits (for example, more rigid vs. more flexible personality profiles).
Risk tolerance, where risk-averse managers are more likely to add slack to protect themselves.
Ethical orientation and moral values, which influence whether managers see slack as acceptable or not.
Reputation concerns and the desire to be seen as consistently successful.
Trustworthiness, including integrity and benevolence, which can help reduce opportunistic slack behaviour.

These behavioural insights reinforce that budgetary slack is not just about numbers; it is about how people respond to incentives, pressure, and uncertainty.

How Budgetary Slack Affects Organizational Performance

Zhuang et al. (2025) emphasize that the impact of slack on performance is not one-dimensional. The research highlights a dual perspective that distinguishes between functional and dysfunctional slack.

Potential Benefits: Functional Slack

Under certain conditions, a moderate level of budgetary slack can provide important benefits:

A cushion against uncertainty, allowing managers to respond to shocks without constant re-budgeting.
Greater managerial flexibility in reallocating resources as events unfold.
Reduced psychological pressure, supporting more sustainable performance rather than burnout driven by overly tight targets.

In highly uncertain or innovative environments, this type of “healthy slack” can help organizations navigate volatility and pursue opportunities.

Negative Impacts: Excessive Slack

The review also concludes that excessive slack has clearly negative consequences. Over time, too much slack can lead to:

Resource wastage and inefficient use of funds.
Reduced managerial effort, as managers can meet targets without fully utilizing capacity.
Distorted performance metrics that no longer reflect true potential.
Lower transparency in budgeting and reporting.
Complacency among employees and managers.

Ultimately, the paper finds that while moderate slack may provide flexibility, excessive slack impairs organizational performance and undermines long-term sustainability.

The Strategic Challenge: Balancing Flexibility and Accountability

The core message from the research is that budgetary slack is neither purely good nor purely bad. It is context-dependent and must be managed carefully.

For executives, finance leaders, and FP&A teams, the strategic challenge is to find the right balance between flexibility and accountability. Some practical implications include:

Clarifying whether budgets are primarily for planning or for performance evaluation.
Reducing information asymmetry through better communication and data transparency.
Using rolling forecasts and scenario planning to reduce the perceived need for hidden cushions.
Designing incentive systems that reward forecast accuracy and honest reporting, not just “beating the budget.”
Combining financial metrics with behavioural insights when assessing performance.

When organizations align their budgeting systems, performance measures, and cultural expectations, the role of slack becomes more deliberate and less opportunistic.

Conclusion

Zhuang et al. (2025) reinforce that budgetary slack is shaped by organizational systems, external pressures, and individual behaviours. It is a complex, multi-level phenomenon, not a simple variance in the numbers.

In environments characterized by uncertainty and competition, some slack can be helpful. However, excessive slack undermines forecasting accuracy, resource allocation, accountability, and ultimately, organizational performance.

If your organization’s forecasts are consistently conservative or your teams “always beat the budget,” it may be time to revisit your budgeting culture and examine how slack is being created and managed.

Reference

Zhuang, C., Abu Bakar, N., & Alias, N. (2025). Determinants of Budgetary Slack and Its Impact on Organizational Performance. Malaysian Journal of Social Sciences and Humanities, 10(3), e003312.