I don't get finance people

[NaanPeshwari]

I have to work with finance people and I really don't understand them.

We have budgets that have to be managed and god help me I hate it. They have different ways of doing things. I'm not dyslexic but there my be some kind of discalculia as if you talk to me about numbers I don't get it. Numbers aren't a language to me, they are, I don't know shapes on a page. So I can work with them if they are written down. But finance people talk too fast in these meetings. I've asked them to slow down but they do it again. What do I do?

I'm a chief finance officer how can we help :)

I’ve been asked to do an AAT course OP, and I am very very much like you. I’m 4 weeks in and I just don’t ’get it’. It’s actually quite stressful and getting me down now.

@NaanPeshwari It's not your fault it's theirs. One of the most important things finance people do is to provide reports to non-finance people in a straightforward format they can understand. If you have pointed out to them that you are having trouble following what they are on about, then they need to re-think the way in which they are presenting (or asking for) information.

Keep asking them for clarification.

I get you, OP!
When one of our finance people asked me "do you want me to reverse out the vat for you?" I had to ask her to explain what she meant. She did. I was none the wiser. Glad to have left it all behind.

If they can’t explain it all to you in a way that you understand then they don’t understand it themselves either.

Ask for the presentation before the meeting,
Ask them to circle the numbers they are talking about.
Ask them to use waterfalls. Showing the building blocks explaining the variance.
Ask them to use colour coding conditional formatting.
Ask them to show percentages as well as absolute numbers.

Get familiar with finance lingo for example, favourable, adverse, Year to date, cumulative, forecast, budget, variance.

Ask them to provide the headlines and repeat back to them what you understand.

Are you good at managing your own financial budget? Start there.

Can someone explain accruals to me? Our nice finance colleagues are always talking about accruals and prepayments in relation to my budgets, and my brain can't compute any of it. I'm honestly not stupid, I manage many people and large budgets competently. But I can't get my head around it ... What we need @NaanPeshwari, is a translator to sit between us and them.

I think I do budget management and they do accounting or something. And never the twain shall meet.

Accruals are all about matching income and expenditure to the period it relates to. If you pay a £300 gas bill for a quarter then each month your budget report should show a cost of £100. If you pay the bill in arrears (at the end of the quarter) then the finance team should accrue £100 each month until the bill gets paid - so that your figures accurately reflect the cost to the organisation. If you pay the bill in advance you treat it as a prepayment, so rather than showing a £300 cost in the first month of the quarter you show £100 and move the £200 prepayment for the next 2 months to the balance sheet (then they should move £100 from the balance sheet to your budget in each of the next 2 months). It is all about matching finances to the right period.

Plus I agree - a good finance person should be able to explain it in a way you understand!

Accrual is taking something into account that's not showing on the books yet. E.g. you did work for a client in June. It's July now and you still haven't invoiced the client. But you need to take it into account as it's revenue attributed to June. So do an accrual.

Prepayment is the opposite- you have been paid for the work but haven't done it yet.

accruals
imagine you know you need to pay for your electricity for the month but the bill hasn’t come through yet. You might put the money in a separate savings account to stop you spending the money this month and put it back into your bank account the following month when the bill comes in.
in your bank statement it would look like you spent the money this month ( but you haven’t as it’s in a savings account ) and the following month you would see savings coming back in which you would use to pay the bill.
Accruals recognise an unpaid expense in the correct month when you haven’t yet paid

Accruals - costs you’ve incurred but haven’t been invoiced for yet (at the date of the report e.g. month end). For example if you’ve used a consultant in June, but don’t get the invoice until July, the June accounts have an accrual for the amount so the cost is recorded when you got the benefit.

prepayment - costs you’ve been invoiced for but not had the benefit yet, so the cost is taken out until you’ve had the benefit. For example, if you pay June, July and August rent in June, at the June accounts date you’ve only benefitted for one month of it, so the other two months are prepaid so that only the June cost is included for now

Prepayments are where you have paid for a service you haven’t yet fully received. Imagine you have a contract for streaming for a full year that you can cancel at any time. So you may pay up front for a full year but actually if you cancel half way through you would be entitled to a refund of 6 months. A prepayment means that when you look at your accounts it only reflects the cost of the services you have received & not been charged.

That's a good way of saying it.

Okay, brace yourself.😂

Say your business pays an invoice dated in September for software support. The software support is for the month of October. You have paid in advance. That is Prepayments because you don't include that payment in your September expenses, you carry it forwards to October.

Annual invoices for something like insurance will cover a whole year and be paid in one lump sum at the start of the year. It is not fair to have the whole year's expense affect one month's accounts, so the finance people will divide it by 12 and spread the cost out equally month by month over the whole of the next year, . Some of it is of future benefit to the company, as it is already paid for, but haven't used it yet.

Accruals are the opposite. You receive your electricity bill dated the 1st October but it was for the usage for the previous month in September. So when they accounts staff are preparing September's accounts they need to reflect that the cost is a September expense even though the bill doesn't arrive until October. You have used up that electricity but haven't paid for it yet.

Hope that helps you a bit.

I have never been in a meeting with finance people where they don’t have either a PowerPoint or printed copies of numbers/data to present. If your finance people aren’t doing that, then they are the problem.

So accrual is like stuff you owe.

Got lost on prepayment!

Love these explanations. Would love to see more, like the difference / definition of 'delta' vs 'movement' vs 'variance'. I know they all kinda mean 'change' but they seem to be applied in different ways.

Thank you Finance People. I will read these very carefully, understand it all for a glorious moment, and then forget it all again because I'm "counting down" (budget = xxx, spend = xx so why doesn't my figure match your figure on the reports)? And you are doing something more clever and complicated.

I'm 100% certain it's me, not you though!

Prepayments are something you have paid in advance, so the cost relates to a future period. You don’t show the full cost of what you have paid, only the portion that relates to the current period (month/year to date). You then release the prepayment, each month until it is all used up, so that each month shows the cost you have paid for that month. (Income is the same in that you accrue income you should have received but haven’t whereas when we receive income in advance, although we do the same thing as we do with a prepayment of expenditure, we call it deferring the income).

Hope that helps a bit!

So prepayment is like stuff you paid but are pretending you owe?

That will depend on what is being reported. Variance should be the difference between your actual income/expenditure compared to planned/budgeted income/expenditure. Delta is not a finance word in my world (though does mean change). Movement I would expect would relate to trends - so how has your variance moved since last month for example. It is a bit report specific.

I always think it is helpful for reports to have the words adverse/favourable against variances so it is very clear the areas where you are doing better or worse than budget. Percentages can also be useful.

You are a customer of the finance team so they should be supporting you.

I work in a finance-adjacent field and do think there's a different way of thinking in the sector. It's more than language. Ideas just seem to be a different shape.

Take debt. To the non-finance world, debt is an absence, it's the opposite of having something, it's less than nothing. To the finance world, it's an asset. It took me months of hearing about 'buying debt' before I plucked up the courage to ask how that even works.

Similar with buying credits. If a credit is like an IOU, then how to you trade them? I mean, who actually gets anything viable from basically swapping IOUs? Apparently they someone does but I just don't see how.

Thank goodness someone else doesn't understand them either .

I manage a small budget at work and keep track of my spending against my budget. I also manage a team whose job is analysing data, something I have 30 years of experience in, but to my severe embarrassment I struggle to understand my monthly finance budget reports, even more so now that they have added staffing costs to the reports.

The last report I got was covered in red numbers. When I asked about it, finance explained that it was because we were carrying a deficit on staffing costs . Well duh, we are understaffed because of a job freeze at the moment but red makes me think I have overspent somehow. I just couldn’t make head of tail of the actual numbers

Now, I just make sure I don't spend more than my budget and basically ignore the monthly reports 😳