Finance vs Accounting - what is the difference?
Many people use the terms finance and accounting as interchangeable. However, in terms of content, scope and especially focus, these are two different corporate functions or areas that are of course closely connected. As for company managers, it is advisable that they master and have practical knowledge of both disciplines.
Finance and accounting operate at different levels of the corporate asset and liability management spectrum. Accounting provides an overview of the organization's financial situation using past and current transaction data, by processing inputs it creates information within the company and prepares materials for reports and statements. Finance is essentially oriented towards decision-making and the impact of financial activities on the future development of the company. Therefore, we can simply perceive the difference as a hierarchical matter. Accounting is responsible for collecting data, and finance makes decisions based on it.
Finance refers to the ways in which a person or organization creates, uses and makes decisions about financial resources. In other words, it's about how a business manages its money. Activities that usually belong here are corporate financing , investing, allocation of resources to specific activities, financial reporting and controlling , budgeting and forecasting , as well as business valuation.
An expert or at least intuitive understanding of finance is an essential part of the skills and knowledge of every good leader. Understanding planning, value creation and its measurement can lead to intelligent and effective decision-making in a business, as well as professional advancement and improved communication with all stakeholders both inside and outside the business.
Finance skills that every executive should master include:
- Understanding financial statements : Financial statements are the basic source of data about the financial situation of the company. It is essential to be able to read and interpret them. This includes income statement, balance sheet and cash flow statement.
- Analysis of financial indicators : Indicators are a set of tools for maximum utilization of data from financial statements and accounting. Basic financial indicators provide us with a detailed overview of liquidity, indebtedness, activity and profitability. We can manage the company with the help of financial indicators, and the indicators themselves or their specific values can also represent partial goals that the company and its management want to achieve.
- Cash flow management : The well-known saying "cash is king" refers to the efforts of managers to maximize the company's available funds and subsequently allocate them as efficiently as possible.
- Planning and forecasting : Considering the orientation of finances to the future, the key to success is precise planning and forecasting of the development of business activity.
- Orientation in the financial environment of the given industry : In order to successfully compete or maintain a position on the market, it is necessary to know the financial situation in the industry and to have an overview of the financial position and values of the indicators of the closest competitors.
Accounting oversees the processes of statements creation and reporting financial information about a company, department or individual. Instead of strategic financial decisions, it captures an accurate overview of the financial situation of the participating party at a specific point in time and thus creates and prepares information on which financial activities are generally based.
Typical activities related to accounting include recording transactions, recording data, collecting financial information, compiling reports and analytical documents, and summarizing performance in the form of financial statements - balance sheet, profit and loss statement and cash flow statement. All this is used and contributes to understanding the position of the organization at a given time and helps finance to make the right decisions.
- registration or documentation - accurate records of accounting transactions during the year in monetary and non-monetary terms
- informative - provides information for the company and external interested parties
- control - ensured by methodical means and instructions in the accounting system itself, also necessary for compliance with the law
- economic - ensures the actual execution of some financial decisions (transfer of funds, communication with other organizations, etc.)
Accounting is often divided into two segments: managerial accounting and financial accounting. Managerial accounting focuses on internal accounting processes and generates reports that are referenced by management. It has no legally binding content and form. It serves the internal needs of the company's management and may contain various corrections and additional data or explanations. Financial accounting focuses on the aggregation of information into financial statements for both internal and external use. It has a precisely defined content and form, mostly regulated by laws, decrees and guidelines. It is also used for the correct calculation of income tax. It consists of regular accounting entries created during the accounting period and accounting statements compiled, if necessary, on an ongoing basis, but especially at the end of the accounting period.
- Measurement of financial performance : Accrual principle of double-entry bookkeeping or recording transactions according to the period with which they are temporally and materially related does not equate to the approach of finance, for which it is more important when the real movement of money occurs.
- Determining the value : Conservatism is often used in accounting, whereby the value of assets is projected as potentially lower and liabilities higher, taking into account various risks. Through financial analysis, finance is able to assign a value to, for example, future cash flows, projects in development at the initial stage, etc.
- Different expertise : Accountants and financial analysts have different knowledge, skills and, last but not least, experience. It is already obvious during the study itself, where we meet with a different focus such as "accounting and auditing" versus "finance, banking and investment". It's the same with practical specializations - accountant can be an expert in the tax field or human resources agenda, a financial analyst can deal exclusively with data analysis or evaluates businesses or creates budgets, calculations and plans.
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