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?

Prepayments is something you pay in advance, ahead of when you use it.

Depending on how things are reported, delta can mean the difference between what was projected and what actually happened, and variance can mean the difference between periods. So for example, you are expected to sell 12 in a year, and you do, but you sell 12 in one month and zero the other months. Your delta is zero (you sold what you were supposed to), but your month on month variance is very high.

Accruals and prepayments are like a kitty. If you know you have a bill of x coming, you put your accruals into the kitty so you will have the money to pay it. If you have paid something in advance (prepayment), you have the money in the kitty and you draw it down as you use the thing.

This is brilliant. I would love it if everyone put adverse/favourable on variances! And very good to know delta is actually a finance bullshit bingo score rather than a real thing. Thank you 😊

Not quite. You have paid for the current period but also for future periods. Going back to the gas bill example. You have paid £300 for a full quarter in month 1. If you show the £300 in the M1 report that skews your figures and makes your costs for that month look higher than they are. Finance take the £200 prepayment (the costs for M2 &M3) and move it to the balance sheet (don’t worry about what that is too much, it has separate reports!). Your M1 report then correctly shows a cost of £100. In M2 the finance team take £100 from the balance sheet and move to your budget so M2 shows the right cost and this repeats again in M3.

By the time you get to M4 the quarter 1 gas bill is correctly shown in M1-3 and no more adjustments are needed for M1-3 but by then you may have either paid the next quarter’s bill in advance again - so you repeat the prepayment process as above OR the bill hasn’t arrived so the finance team will accrue £100 of cost for M4. And will continue to do so until the bill arrives.

if you want to know about the balance sheet just think of it as the opposite of what happens on your budget (for accruals and prepayments). An accrual adds a cost to your budget (a debit) and creates an equal credit on the balance sheet. The gas company is your creditor i.e. someone you owe money to.

When you have prepaid a bill the whole £300 hits your budget in M1 as a cost (a debit) and finance credit your budget for the amount relating to future periods (reducing your expenditure to the correct amount of £100) and creates a debit of an equal amount on the balance sheet. This debit is an asset as the gas company effectively owes you for £200 of gas which you have paid for but not received. If they don’t supply it they would have to refund you the £200.

What is waterfalls?

I feel better not being alone! Maybe will be more confident in the meetings.

Not really. Start of by thinking about something physical. Say toilet roles, you go to costco and buy 48 but you only 4 per month. You would have 48 at the start of the first month, then 44, then 40 until you had zero at the end of the 12 month. In the monthly profit and loss account you would only include the 4 you used each month.

A prepayment is essentially the same but for a service. Take car insurance. If you paid 48 pounds for the year, the monthly cost would be £4. So you would hold 48 pounds of insurance at the start of year, then at the end of month 1 you'd have 44 pounds of insurance left, through to the end of hte year when you would have no insurance left. So similar to the stock your monthly P+L would have the 4 pounds of insurance you used each month,.

Do you get a budget holder manual and budget holder training? If not suggest it to your finance team. They should take you through it step by step until it makes sense (and conversely as a finance person you hope that your budget holder will explain things about the operations side that you may not know but which you need to understand in order to accurately forecast/set budgets).

I would also suggest that if you keep your own figures and they don’t match the finance report that you sit together to reconcile the two sets of figures so you can understand why they are different (likely to be because of accruals/prepayments/deferrals, though depending on your area could also be things like depreciation if your area includes capital assets).

I have two degrees and a masters all related to data.

Finance, budgets, etc. Not a clue. I’ve done courses and it just doesn’t make any sense.

How can spending be bad (we need to save this quarter), not spending be bad (you haven’t spent to plan or we can’t exit the year with money in hand). Damned if you do, damned if you don’t.

I’m asked for a finance plan for up to 15 months ahead. How do I judge that?? How will I know who leaves, how projects will be supported we haven’t even thought of yet or spends be accounted for when I don’t know I need to buy it in December 2026 when it’s August 2025

It’s all nonsense 😂

A waterfall chart is a type of excel chart that starts with one bar being say how many toilet rolls you had at the start of the month say 10, it then has steps that move the bar up and down representing the changing. e.g. you went shopping and brought 20, then you used 4, but you also lost 3 because the toddler dropped them in the loo. So you had 10 + 20 you brought - 4 used - 3 lost to the toddler you end with 23 which is the final bar. I've added a picture.

When you buy debt you are being like the bank (the lender), not the person with the debt (the borrower). So bank A gives someone a sum of money and in return receives monthly payments till it’s all paid back with a tidy profit. But then bank B buys the debt ie gives bank A the same sum of money and in return they get the monthly payments till it’s all paid back with a tidy profit. To the banks it’s an asset and it can be held or sold on.

Two different issues here I think. Budgeting itself isn’t nonsense. A budget is a financial representation of your operational plan. What billable activity will you carry out and what resources do you need to achieve that. Variances to plan are not necessarily bad - it is about understanding the drivers of the variance and deciding if action needs to be taken. You can’t predict leavers but I would assume you would look to recruit (leaving aside a recruitment freeze). Similarly costs being up shouldn’t be an issue providing activity/income is up. Budget reports should inform management and assist decision making - they aren’t supposed to be an exact prediction.

You can either zero base budget - start from scratch looking at what activities you will deliver and identify all of your associated costs or, more likely, start with the budget for last year and factor in how your activity will change, any known staffing changes or other costs changes related to the changing activity then factor in inflation. You may also be aware of other changes with a financial cost - say additional regulatory costs or extra insurance etc due to new sector rules

However if you are simultaneously being berated for spending/not spending at the same time then that is a management issue - I would be asking what is the organisation’s actual strategy??

Firmly disagree. Explaining things well is a completely different skill to understanding whatever it is you’re meant to be explaining. Plenty of brilliant scientists would make terrible science teachers.

I do a fair amount of 5 year forecasting for businesses. It is an odd art where you know almost every single one of the assumptions you make is going to be wrong but you hope that it averages out and on balance you get it right.

Definitely more art than science so not surprising someone with a proper data back ground doesn't find it comfortable :-)

I'm a group finance manager. I will with people all day long whom openly don't have a clue:) however, after a few months, the ceo now looks forward to our meetings.

Ask them to bullet point and highlight anything they think you need to be aware of and advise.

charts are more helpful to creatives than spreadsheets.
There is no such thing as a stupid question, and you may see patterns in the numbers an accountant won't because of how you look at and interpret the figures.

Your budget manager is supposed to listen to you, know the business, produce a budget, go through it with you line by line, check and flex with actuals, and discuss what the numbers are saying vs the work- you can what is going to happen.

Or ask copilot to explain the reports to you in summary.

I'm completely with you. I'd I was studying science I was much rather than a average scientist with great communication skills, than a scientist at the top of their field with poor communications skills.

Oh yes, my favourite task, the dark arts:)

Thank you, that makes sense.

I do try to predict as best I can based on previous years. Cost rises can be predicted based on contacts we have in place (we know supplier X increases by 5% each year for example). Headcount replacement usually means we hire someone who wants a bit more than the leaver so I know if I have a leaver then I’ll need to work on what I have in the variance.

Say though, the office kettle blows up. We replace it. However, last June/July I didn’t know the kettle was going to blow up in October 2025. I’m now in the red. I’ve overspent on equipment.

There is never a single penny allocated to discretionary spend even though it happens every year.

I’m a data scientist. A large part of my job is explaining my results to non-data scientists. I have to present the information in a way that is quickly digestible and easy for a non-expert to understand. If I don’t do that, I have failed my main objective. It doesn’t matter how brilliant an analysis I performed, if I can’t translate it to the masses, it doesn’t get used anywhere.

One practical issue may be that some people understand numbers better verbally while others need to see them visually. If you need a particular method, don’t be afraid to speak up.

I wouldn't worry about waterfalls @NaanPeshwari . I'm a finance person and despise them.

Haven't seen if someone has explained prepayments to you, but they're pretty straight forward.

If you pay 12 months rent in advance that's a prepayment because you have paid the expenditure upfront, at the beginning of the period it relates to.

As many people noted above, financial reporting looks at monthly costs to businesses. If you prepay, that full cost will show in one month and make the figures look really wrong as they are too high.

Using my example of 12 months rent in advance paid 1 September. Assume rent is £1000 per month, 12 months would be a £12000 prepayment. So, if you just reported the cash spend, you would have 12000 in September. But that payment is for September 2025 to August 2026. Instead, the rent is recognised as a monthly cost of 1000 for rent over the 12 months. Rent cost after 3 months is 3000 and the value of the prepayment is 9000.

So it's sort of like 2 buckets. At the beginning everything is in the prepayment bucket. As the year moves on, every month the cost of rent (1000) moves from the prepayment bucket to the rent bucket. By the end of the 12 months the prepayment bucket will be empty ie Nil and the rent bucket will be full ie 12000.

Prepayments show on the Balance Sheet (Statement of Financial Position) as an asset as they have future benefit to the company. That's where the bank account balance also sits as well as debtors (people who owe you money), creditors (people you owe money), employee payments owing, assets like cars, buildings, equipment, land etc

Rent shows on the Profit and Loss (Statement of Financial Performance) as it is an expense that is taken into account to calculate the profit of the company for the relevant period.

My brain never processes that money you’ve paid out for a future service is an asset as that money is spent. Yes it’s paying it forward but it’s still spent and you can’t get it back.

Oh gosh. Don't get me started. My financial explanations differ greatly depending on the audience. HR executives- they do words. Marketing - visual. Finance, numbers. Researchers - whole of project irrespective of the number of years the project runs for.

After many years uni, professional quals, ongoing professional training I have be known to use the word "squiffy" to explain why figures needed further investigation. The audience fully got what I meant - the numbers just didn't make sense and I needed to get to the bottom of what was causing the anomoly.

A good financial report is one that isn't thrown in the bin the minute you walk out of the room and the one people chase if they haven't seen it. The value is from the analysis, not a page of numbers.

Underspending can be a bad thing - it can impact on your team's ability to deliver activity (e.g. if you're underspending on staff or consumables that are needed to deliver activity). Depending on where your team's budget comes from, this could impact adversely on income, making the team less profitable.
Underspending on capital can lead to far greater costs down the line - e.g. if you don't spend on a new roof, you could end up with leaks leading to service disruption and bigger repair costs.
Lots of organisations (particularly public sector) set totally unrealistic budgets - either impossible income targets, or no budget for basic non pay essentials or insufficient budget for staffing taking into account headroom (all the time and employee isn't doing their actual job because they're off sick, on training, on annual leave etc).

That's true, but you've also given yourself a reprieve from the cash coming out of your bank account for 12 or more months.

That can be very useful to get eg favourable rental terms. You may have an agreement that, if you pay 3 years rent in advance, your rent will be at today's rate and no annual increase will be added. So by prepaying you are reducing future costs.

It's really common for rent, software subscriptions (which can cost 100s of thousands for large organisations). Pay in advance now for a cheaper price.

I've had one organisation pay 20 years rent in advance (obviously had a lot of cash to do that)

This is really clear, thank you