We’re going to mine data found in our income statements. No guesswork here; just use numbers from your financial statements. A spreadsheet is the best tool for developing your budget because you can easily play with the numbers. Most accounting soſtware applications include budget features that can help and even facilitate electronically migrating (exporting) any historical data into your spreadsheet model. If you don’t know how to use a spreadsheet, you can do it manually but, obviously, this approach will be far more labor intensive and primitive by today’s norms. Hint: Find someone to help you with the spreadsheet part and consider using the spreadsheet model templates accessible via the directions provided at the beginning of this article. Go ahead now and take a peek at Figure 1 to create an image of where we are going. You will be creating your own version of Figure 1 using your numbers and income statement categories. Next, we’ll look at some mechanical steps that are illustrated in Figure 1. 1. First, take your most recent monthly income statement (P&L) and record in a column the year-to-date (YTD) num- bers for each category of income and expense. Use the same vertical format as your income statements. Typically, com- panies use their September or October monthly income statements from the current year. We’ll use October, which includes the first 10 months YTD of our 2019 12-month cur- rent year. If your company is not on a calendar fiscal year, use your most recent 10 months of the current fiscal year (see Figure 1, column D). 2. Since you only have 10 months of data at end of October, the second step is to “project” or forecast the remaining two months of the year so that we can have numbers for an entire 12-month year. Ten months of data will be actual from your October YTD income statement, whereas data for the last two months (Nov. and Dec.) of 2019 will be projected or fore- casted. Some prefer to use the “SWAG” forecasting method (this term was coined during the Vietnam war). You know, the Scientific Wild Ass Guess method, but we can usually do much better than that. So, bite the bullet and determine your best-estimate pro- jection for the remaining two months of 2019 (November and December). Then add these to the YTD numbers for the first 10 months, January through October. Congratulations: You now have a projected 2019 year-end set of (12 months) numbers for each income statement category. You should now have one column for the YTD October numbers (10 months; Figure 1, Column D) and a second column for your WWW.ALOA.ORG full projected year-end that represents 12 months for 2019 (Figure 1, Column E). 3. Using your 2019 projected year-end numbers, think about what is expected or likely to change (up or down and by how much) for 2020 for each income statement category. What is your plan for 2020, and how will it impact your numbers? Usually, your income or sales section is the most important, so you should spend most of your time on this part. Any new products or services? Any expansion of territory? Use the top-down method (assign percentage of change), then do a bottom-up and identify where the growth will actually come from. If you expect 8% sales growth, how much will come from price increases? How much from product sales? Installment or repair sales, etc.? Reconcile your top-down and bottom-up sets of num- bers. Do a sanity check. No… on your numbers, not on your mental state. There can be a fine line between “certified” and “certifiable!” For each category, ask yourself these questions about your 2020 business activity: Will my projected 2019 year-end numbers go up, down or remain essentially flat in 2020? Do this line by line. By how much? Why? 4. Now, create one more column and post those 2020 bud- get numbers alongside of your projected 2019 year-end numbers (Figure 1, Column F)*. Review the side-by-side comparison (Figure 1, Columns D, E and F) and remember that Column D only represents 10 months. Here again, the spreadsheet tool makes it so much easier to play “what if” and not waste your time fooling with the math. You may not like computers (probably a mutual feeling), but they are far better and faster at crunching numbers than you are. It’s more important that you invest most of your time thinking about your plan and its potential and likely impact on your numbers for next year. *In our Figure 1 model, note that Column G in the actual model contains a blue percentage number, meaning that your input is required. Instead of calculating your 2020 budget numbers manually, Column G contains formulas that will calculate your budget numbers for Column F us- ing your projected 2019 year-end numbers. So once you have your 2019 projected year-end numbers in Column E, you can input your expected percentage into Column G, and the formulas will populate your 2020 budget result. FEBRUARY 2020 KEYNOTES 23
