What’s the Difference Between Accounting and Finance

What's the Difference Between Accounting and Finance

Table of Contents

They are two distinct disciplines, and you better treat them as such if you want to avoid major financial mishaps.

Using the right word can matter. Using the wrong word can matter even more, especially in the business world. And you as a business owner can not afford to risk a financial mishap just because you didn’t know the difference between two words – Finance and Accounting.

Bellow, we’ll tell you all about the difference between accounting and finances and give you hands-on tips on how you can avoid accounting problems and improve your financial management. But if you’re too lazy to skim over the whole article, at least scroll to the end, because there’s a really cool infographic about the differences between accounting and finance.

Okay, first, let’s start with why this matters.

Why you need to care about this

Not knowing the difference between venomous and poisonous or sociopath and psychopath might not get in you in any significant trouble (although still likely to cost you a couple of embarrassments). Yet, when we’re talking about business, it’s different. There is a lot more at stake than just your reputation.

It’s the success of your business we’re talking about.

Finance and accounting are among the fundamental pillars of every business. Without them, there is no way you can successfully run an enterprise.

It’s almost tragic how often one hears business owners use these words interchangeably. This generally means that they are either neglecting financial management or the accounting processes.

So, again. Why do you need to care about this? Because, simply put, without accounting, you will have absolutely no understanding of the day-to-day flow of money in and out of your company.

While without financial management, you will not be able to develop an accurate picture of your company’s future growth.

Now, let’s finally establish the difference between accounting and finances, and then move on to some juicy tips.

What is Finance?

In short, finance is all about managing money and investments.

For those who’re already asking: “Isn’t that what accounting is about too?”. Well, no. Just base with us for a bit, we promise by the end of the article everything will be clear.

On a more day-to-day level, we can say that finance is associated with budgeting, forecasting, lending, saving, investing and borrowing or put in another way – it’s all about asset and liability management.

All about Business’s Financial Operations

The easiest way to explain what finance is about is through examples. Here are a few operations that finance professionals are in charge of:

  • Developing financial forecasts.
  • Analyzing the accounting data with financial ratios like the current ratio or the quick ratio.
  • Supervising equity investments.
  • Organizing and managing credit arrangements.
  • Issuing and selling shares or corporate bonds.
  • Buying dividend-paying stocks, blue-chip bonds, or interest-bearing bank certificates of deposits (CD).
  • Managing company acquisitions.

These are all financial operations that need to be managed on a day-to-day basis.

Just to touch upon this too. Finance might mean different things for different types of businesses:

  • For small and medium businesses finance is about planning, financial forecasting, and budgeting. Or, in other words, interpreting and analyzing the data in their books as well as developing different financial models for investment or growth purposes.
  • For large corporations finance is more preoccupied with acquisitions, credit management, issuing bonds, investing in dividends, etc.

There are just tons of financial operations businesses undertake, and all of these are in the hands of financial professionals. This is what finances is about.

Now, here are some tips for you to better manage your business’s finances.

Tips to manage your finances

Dos

  • Keep accurate records and check them regularly
  • Use a separate business bank account to keep a clear record of the money coming in and going out of your business
  • Put aside a portion of your income into a savings account to cover your taxes and levies
  • Set a budget and compare how you’re actually going against the budget every month to make sure you’re on track.

Don’ts

Avoid these common mistakes to keep your business finances on track:

  • Not having access to records that can help you understand your finances.
  • Spending the money in your bank account, not realizing it’s needed to cover bills.
  • Not putting away money as you go to cover your taxes and levies.
  • Invoicing late and not chasing up debtors — this has a huge impact on your cash flow.
  • Not getting advice when you need it or trying to do it all yourself.

Okay, so. Now to accounting.

What is Accounting?

When we say that there is no way you can run a business successfully without bookkeeping, we mean it. Why?

Think about it. How will you make the right financial decisions if you don’t have a clear idea about how your business is doing? Exactly, you won’t. Only by analyzing the firm’s income, costs, taxes, etc., can we determine whether our business is profitable.

Accounting, in contrast with finance, is more about recording and communicating the company’s numbers. These are the people who manage the company’s payroll, cash flow, reporting, etc. They are the ones keeping the hand on the pulse and communicating the information with business owners or other managers.

We go more in-depth about why every business owner needs to care about accounting in another article. Here’s the link.

Communication of financial information is the key here, which can and often does get quite tricky. It’s not always easy to keep track of all your accounting documents. That’s where digital accounting and financial tools like Kernel can help a lot. But we’re not here to talk in-depth about accounting software. You can do that over here. Now back to accounting stuff.

Managerial and Financial Accounting

For the reasons of clarity, we need to quickly differentiate between two types of accounting:

  • Financial accounting is often mistaken with finances. In reality, though, it involves the generation of financial statements like a balance sheet, income statement, and cash flow statement. This information is used by external parties like investors, creditors, and taxing authorities.
  • Managerial accounting, often incorporating cost accounting, basically involves the same financial accounting statements, but it’s only used by the company management itself. This can also include forecasting, budgeting, and other financial analysis tools.

So, financial accounting is for people outside the company, while managerial accounting is for internal use.

Now, for some tips.

Actually, we have two whole articles devoted specifically to tips about accounting. Here:

To recap the difference between accounting and finances here’s an infographic.

Accounting vs Finance

We'll tell you all about the difference between accounting and finances and give you hands-on tips on how you can avoid accounting problems and improve your financial management.
What’s the Difference Between Accounting and Finance

Conclusion

We’ve covered the difference between accounting and finances in depth now. So, it’s quite safe to say that while accounting and finance may go together, there are key differences: accounting focuses on the flow of money and out of a company or family, while finance is a more broad term that describes how one manages assets and liabilities.

Accountants, by nature, are backward-looking because they take historical financial information to prepare their reports. By the time their reports come out, the figures could be several months old. Finance professionals, by contrast, are forward-looking because they have the nearly impossible task of trying to predict the future.

They are two distinct disciplines, and you better treat them as such if you want to avoid major financial mishaps.

Actually, we have a whole article devoted to the most common accounting and finance mistakes and tips on how to fix or avoid them. Reading it is worth the trouble it’ll save you.

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