Four weeks after the close. Matteo presents the revised budget for the year to Graham, now that the year-end numbers are final. Graham questions every change, line by line, and asks the question every analyst has to be ready for: what is this number based on?
Thanks for the time. I'll give you the headline first, then the three changes, then the risks.
Matteo tells Graham the order of the presentation before he starts. Senior people often interrupt; a stated structure makes it easy to say "we'll come to that in the risks" and stay on track.
Good. Go.
In December, the budget had operating profit at four point two million. The revised version is four point zero three. So, down a hundred and seventy thousand.
Matteo says the number is down, and by how much, in his first real sentence. Leading with the direction and the size, even when it is unwelcome, is what a finance director expects. Hiding it on slide six only makes the question sharper when it comes.
Before the changes, one question. Is the starting point the final year-end numbers, after the credit note corrections?
Yes, the corrected numbers. And last year's sixty-four thousand is treated as a one-off. I haven't repeated it this year.
Good. One-offs out of the base.
Before discussing changes, Nadia checks what they are changes from. If the base is wrong, every number built on it is wrong too. It is a short question that experienced controllers ask first.
Down. And three changes.
Three changes. Rebates up sixty thousand. Freight down a hundred and forty. Returns down ninety. Sixty minus a hundred and forty minus ninety is minus a hundred and seventy.
Matteo explains the movement from the old number to the new one as a short list of parts that add up. In finance this is called a bridge, or a walk. Saying the arithmetic out loud shows that nothing is missing.
It adds up. Start with the one that's going the right way, because I trust that one least.
Graham asks to start with the improvement, not the problems. Experienced finance people often check good news hardest, because nobody else will. It echoes the close: a surprise is a surprise in either direction.
The rebate. Last year we crossed tier two with Ferrand, which we didn't expect. The December budget assumed tier one again this year. I've moved it to tier two. That's the sixty thousand.
Why wasn't it in December's version?
Because in December we didn't know we'd crossed tier two. The Ferrand statement only came on day three of the close.
What's this number based on?
This is the question every number in a budget must be ready for. Graham asked it at the kickoff about the rebate estimate, and he asks it again here. If you present numbers to a finance director, prepare this answer for each one before you walk in.
On buying the same volume from Ferrand as last year. Four point one million. Tier two starts at four.
So if we buy three per cent less, we drop below four, and we lose the whole sixty.
Yes. It's not a slope. It's a cliff.
A slope means a small change in volume gives a small change in rebate. A cliff means a small change can remove all of it. Matteo uses a simple picture to describe the risk, which is easier to remember than a sensitivity table.
Then I don't want it hidden in the total. Show it on its own line, and call it what it is. Rebate at tier two, dependent on volume.
I can do that. Same principle as the day-two estimate. A number with a label on it.
Matteo recognises Graham's request as the same rule from the kickoff: label an uncertain number. Linking a new request to a principle the team already shares shows you understand the reason, not just the instruction.
How confident are you in the sixty?
Medium. The volume is there today, but one of our biggest customers is reviewing their contract in the summer. If they leave, we drop below four.
Then that sentence goes next to the number as well.
Graham asks for confidence, not just the figure, and Matteo gives a level and the reason behind it. A number with a stated confidence and its main risk is far more useful to a committee than a number on its own.
And if we're close to the line in the autumn, what would you do?
Talk to purchasing in the third quarter. If we're just below four million, we could bring an order forward from January into December. It's legitimate, but I'd want you to approve it.
It needs approval, yes. Write that down too. I don't want anyone timing orders to reach a rebate without telling me.
Moving an order to reach a rebate tier can be a normal business decision, or it can look like managing the numbers. Matteo raises it himself and asks for approval; Graham makes it a rule. Saying a sensitive idea out loud, early, is how you keep it clean.
And how much buying from Ferrand do we have visibility on today?
Orders for the first quarter are about one point one million. On track for four point four if it continues. But that's one quarter.
One quarter is a data point, not a trend. Keep the sixty, keep the label, and tell me after the second quarter if it still looks safe.
Freight. We signed a new carrier contract in January. Rates are up eight per cent. On our volumes that's a hundred and forty thousand.
Based on?
The signed contract, and last year's shipments. Both are in the appendix.
Then I have no questions about freight. I don't like it, but I have no questions.
Graham separates his opinion of a number from his view of its basis. A cost going up is bad news, but a signed contract is solid evidence. "I don't like it, but I have no questions" is the highest approval an unwelcome number can get.
Returns. December's returns were much higher than we planned, because customers over-ordered before Christmas. I've assumed the same pattern this December. That's ninety thousand more in returns allowance.
One bad December, and you've made it the new normal?
Graham's question points at a common weakness in forecasts: treating one unusual event as a pattern. It is a fair challenge, and it is phrased so that Matteo has to defend his assumption with evidence, not with confidence.
Not only one. I looked at three years. Two of the last three Decembers were like this one. The quiet one was the exception.
What made the quiet one quiet?
A promotion moved a lot of orders into November that year, so the returns came earlier. It hasn't happened since.
Then that's a better argument than the one on your slide. The slide says "based on this December". Change it to "based on three Decembers", and show me all three.
Matteo had a strong answer, but his slide showed a weak one. Graham accepts the number and asks him to change the slide, because at the committee Matteo won't be there to explain. The written basis must be as good as the spoken one.
Fair. I'll change it.
And if returns are going to be high every December, that affects us too. Most of last year's problem came from return credit notes arriving late.
That's the credit notes again.
Exactly. So next January, the quarterly review should start a week earlier, while the returns are still coming in.
Do it.
Nadia takes Matteo's assumption about returns and asks what it means for her process. A budget assumption is not only a number: it can tell the controls team where the next problem will come from.
Now the question I always ask. What's not in this budget that should worry me?
A budget is judged by what it leaves out as much as by what it contains. This question invites the presenter to name the risks before someone else does. Good analysts prepare an answer to it, even when nobody asks.
Two things. The first is the Ferrand cliff we just discussed. The second is the euro. Rotterdam's costs are in euros, and I've used today's rate for the whole year.
How much does a five per cent move cost us?
About seventy thousand, in either direction.
And if it moves more than five?
Then you'd hear it from me at the quarter, not at the year-end. Ten per cent would be double, about a hundred and forty.
Should we hedge it?
Not for seventy thousand. The cost of hedging would take most of it.
Hedging means using financial contracts to fix an exchange rate in advance. Matteo answers with one reason, the cost compared with the risk. A clear "no, because" is more useful in a review than a long explanation of how hedging works.
Then put both sentences in the risks section, exactly like that. The committee will ask. Nadia, anything from you?
One thing that isn't in it. The system warning for credit notes. IT have come back with an estimate: about twenty-five thousand.
We promised Alan a decision by the half-year, not a purchase.
Exactly. So I'd rather not put it in the budget as if it's decided. But I'd like the committee to know the number exists.
Nadia wants a cost to be known without being treated as approved. Putting it in the budget would look like a decision; leaving it out completely would hide it. Naming it separately is the honest middle.
Then show it below the line, as a possible cost, not in the total. Twenty-five thousand, decision by the half-year.
That works. And the Ferrand cliff should go on the risk register. The risk committee meets next week.
Agreed. Add it to the agenda.
So, what goes to the committee. Matteo, say it back.
Operating profit four point zero three million. The rebate on its own line, labelled as dependent on volume. Freight as it is. Returns based on three Decembers, with all three shown. The euro risk in one sentence. And the system warning below the line.
Matteo lists every change agreed in the meeting, in order. Graham asked him to do it, not Nadia, because Matteo is the one who has to make the changes. The person who will do the work should be the one who confirms it.
That's it. When can I have it?
Thursday. I'd rather send it once and correctly than twice.
The committee pack goes out a week before the meeting. Thursday gives me two days to check that your numbers tie to the accounts.
Then you'll have it by noon on Thursday.
And nothing new after Thursday. If something changes, it goes in a note on top, not into the numbers.
Graham sets a cut-off for the committee pack, the same idea as the cut-off in the close. After a fixed point, changes are reported separately rather than quietly mixed in. It is the "no surprises" rule applied to a board paper.
Matteo, you'll be in the room at the committee. If they ask about the rebate, I'd like them to hear it from you.
From me? I'm usually the one who sends the numbers, not the one who explains them.
You found the cliff. You can explain it better than I can. That's the job.
Graham gives Matteo a chance to present to senior people, and gives the reason: he understands the risk best. Letting the person closest to the numbers speak is both fair and more convincing for the audience.
Then I'll be ready. With the basis.
I'd expect nothing less.
One last thing about the committee. The year-end accounts and the budget go in the same pack. They'll ask about the credit notes before they ask about the budget.
Then you take the credit notes, Matteo takes the budget, and I'll take the questions nobody expected.
Graham assigns each topic to the person who owns it, and keeps the unexpected questions for himself. Agreeing in advance who answers what is the simplest way to look prepared in front of a committee.