What is meant by Financial Slack?

Financial Slack is the Unused Debt Capacity

Businesses go through various conditions in their lifetime. There are times when companies earn high income which can be termed as profits or growth of revenues. On the other hand, some companies may go through a downturn in sales, profits, or revenues. In order to sail through such conditions, a company must have extra money. This extra money that can be used when the company is in trouble is known as the financial slack of the company.

  • Financial slack is the untapped debt potential of a company. It may be availed from unused debt capacity, unutilized lines of credit, excess liquid assets, and various other sources of cash.

  • Slack is an important measure related to the debt capacity of a company. If a company uses all of its debt capacity, the amount of financial slack will be zero. In such conditions, the company will be unable to meet unexpected costs that may be necessary for the good health of the company.

In many situations, financial slack is referred to as the unused debt capacity of the company. The unused debt capacity is the amount of debt a company can source for use in various investment projects. It is useful because companies usually need money to grow or expand. The financial slack helps companies to do so in times of need.

Use of Financial Slack

  • Growth − The money stored in financial slack can be used for the growth of a company. In case of growth, usually, a substantial amount of funds is required which can be availed from the extra money the companies save for future use a.k.a financial slack. However, the decision to grow the company and use of financial slack should be made after careful review and analysis so that resources are not wasted in vain.

  • Expansion− Financial slack can also be used for the expansion of the firm. Like growth, expansion also requires a good amount of money. Expansion can be made in local and foreign markets and the amount of funds required is different for different markets where expansion is made. Financial slack can help companies expand in chosen markets when the time is ripe.

  • Innovation − Financial slack can also be used to renovate the company. Renovation is a common practice in manufacturing companies where the use of slack can help it immensely to grow and use the funds without having to source debt from the markets. Innovation is a very useful tactic to increase operations and financial slack can help companies to realize it without having to rely on the markets for the funds.