our need for resources and how to efficiently allocate them. In so doing, we will minimize surprises that could have been fore- seen. Although our budget won’t be entirely accurate (if your budgets and forecasts are, stop reading and immediately invest all of your money in the stock market), we usually get better at it with more experience and as we accumulate more historical data. Of course, some events are entirely beyond our control and just cannot reasonably be anticipated. Why Bother? So if we admit that our budget will ultimately be inaccurate, why bother investing the time and effort in developing one? Do we stop engaging in weather forecasting just because our forecast is not always accurate? Does a military battle plan always (if ever) unfold as expected? The process of developing a budget will be worthwhile, and using it as a management tool will definitely pay off. We can at least manage those aspects of our business that we control or influence, and a budget is a powerful management tool that will help us to do just that. Budget Variances We call departures from our expectations “budget variances,” and they are either favorable or unfavorable. So if actual sales are greater than our budget, this good news is called a favor- able variance. Conversely, if one of our expense categories is exceeding budget, this is bad news and therefore an unfavor- able variance. Some people prefer the terms positive and nega- tive variances, but this can become confusing — especially when numbers have negative signs. Unfavorable variances are sometimes presented in brackets and possibly highlighted in a red-color font. Time to Dig In This article is primarily intended to serve as a guide for those who are new to budgeting or looking for a structured approach. For simplification, we’ll use small numbers that will likely not even remotely resemble your business. Don’t rush or get inti- mated by all of this. Just digest one step of this process at a time. It is highly recommended that you photocopy or print out Fig- ure 1 as a handy reference (ideally on one page) to have when you walk through each narrative step of compiling your annual numbers. Aſter you have completed your own version of Figure 1 using your actual data, we’ll break down those annual num- bers you generated. In Figure 2, we’ll spread them among each month of that year to end up with monthly numbers. At the end of the day, you are trying to do three things with your budget: WWW.ALOA.ORG 1. Generate your version of the Figure 1 template, using your own historical income statement data, categories, lines and format. 2. Develop your own version(s) of Figure 2, which takes the an- nual (12-month years) numbers developed in Figure 1 and then spreads them over a 12-month period into monthly buckets. This provides the numbers for each month so you can track your actual performance monthly compared to your budget expectations. 3. Generate budget variance reports (use spreadsheets or, ide- ally, the budget features of your accounting soſtware) to help identify issues or concerns early and, if warranted, react to significant performance budget variances or deviations. For those who prefer to use the actual spreadsheet model tem- plates for Figures 1 and 2, we are providing access to the full ac- tual Excel spreadsheet models. You can find them linked via this sentence in the version of this article in the General Locksmithing category of the ALOA Tech Link app or in the February digital edition of Keynotes. ALOA members can access the Tech Link app by going to ALOATechLink.com. Your user name is your email address registered with ALOA, and your password is your member number. For assistance, please contact [email protected] or [email protected]. You can elect to simply view the spreadsheets, or you can copy the spreadsheet model file and modify the worksheets (tabs) for your own use, which will hopefully save you time and effort. Caution: Since none of the spreadsheet cells are protected, if you elect to use the actual models, be careful to avoid unintentionally erasing or writing over cells that con- tain formulas. Cells that contain blue-colored data are intended to be re- placed by your actual data, whereas cells that are in traditional black font usually contain either formulas or text that are gen- erally not expected to be changed, except as you require. As a precaution, you may want to copy the original spreadsheet file and work with the copy. Or, you could add more worksheet tabs to the original worksheet file. One Easy Way to Develop an Operating Budget For our purpose, we will use a relatively simple method of de- veloping our operating budget. This will be especially useful for those who have never been through a budget development process and perhaps view this task as somewhat intimidating. Now let’s look at the primary steps. FEBRUARY 2020 KEYNOTES 21
