Suggest some characteristics that distinguish an effective budgeting system from an ineffective one.

Expert Solution

An effective budget (unlike an ineffective one) provides more than just a forecast of income and expenses for a firm. It helps the firm to stay on top of financial trends.

A budget is effective when there is a proper allocation of overhead costs for a given period.

In an effetive budget, expenses expected for a period are related to the revenue which they will generate, providing the firm a more precise picture of their operations.

An effective budget provides you the manner in which you should react in the times of short cash flow.

The purpose of the budget is not to just recreate the previous year's figures with slight modifications. It should present the plans of the firm in an understandable manner. The budget should motivate the employees towards the achievement of the goals set in the budget.

The budget should not overstate the figures, it should be realistic and the targets set should be reasonable and expected to be achievable by the management.

Only when these characteristics are met, a budget can be said to be an effective one.

ekkarill92 answered 2 years ago

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