Why Business Owners Should Care About The Difference Between Accounting and Finance
There seems to be some confusion about the relationship between Accounting and Finance.
Many people use them interchangeably in conversation, but they are not interchangeable in practice. As a business owner, it is imperative to understand the differences when navigating towards a desired future state. The type of result you need - financial planning, financial connections to leverage, or company financial status - determines whether you need someone in Accounting or Finance. The wrong person can put the company on the wrong path.
Fundamentally, Accounting involves historical information, and Finance involves future information.
That’s not to say that they are totally unrelated. Finance decisions are almost always dependent, at least indirectly, on a company’s historical accounting results.
A company cannot plan for its desired financial position unless it knows where it stands now and how it got there. Understanding your company’s state and how it got there is the purview of accounting. Business owners should care about this difference because it impacts the company’s ability to move from its current state to a position that reflects the owner’s vision. This difference in impact is a function of the typical characteristics of personnel who excel in accounting roles versus those who excel in finance roles.
Past vs. Forward Thinking
Often, people who excel in accounting are very detail-oriented and seek high levels of precision, literally to the penny. This trait is great for ensuring that the accounting correctly and accurately represents the company’s economic state. However, the owner’s vision invariably requires some forward-thinking that involves projecting financial results based on assumptions that cannot have the underpinnings of perfect information. As a result, many excellent accountants find it difficult to switch gears and develop projections that reflect the owner’s vision for the company.
Similarly, people that excel in accounting tend to have some personality traits that cause them to be more introverted. This trait typically causes them to actively avoid social gatherings that allow them to develop relationships with potential investors and bankers – often the financial lifeblood for the owner’s vision. Furthermore, it is not typically a job requirement for accountants to develop relationships that might help them more easily move from an accounting role to a finance role. So, for both reasons, they simply don’t seek out relationships necessary to excel in a finance role.
However, people who excel in financial roles tend to be less constrained by the precision
required for accounting, thus find it easier to entertain multiple financial scenarios, none of
which are based on perfect information. While these scenarios should reflect adjustments for events that show how the company will move forward toward the owner’s vision for the company, they must also reflect some reasonable basis in the company’s historical accounting information. This ability to interpret the owner’s visionary thinking through financial projections based on the company’s accounting enables excellent financial personnel to establish trust with investors and bankers. That relationship allows financial personnel to entice investors to provide funds to support the plan that will move the company from its current state to a position that reflects the owner’s vision for the company.
There are always exceptions to the norms mentioned above. For example, many accountants work very hard to emerge from their introverted shell and successfully develop meaningful business relationships that will help the owner achieve their vision. These observations are simply things to consider when you, as a business owner, think you need help – is it Accounting or Finance help you need? Be sure you have the right people in the right seat.
Over the past decade or so, more and more owners of companies (particularly companies generating under $75 million in sales, that don’t warrant a full-time Chief Financial Officer) have availed themselves of the knowledge and relationships of an experienced CFO by engaging a fractional CFO who spends a portion of their time each month working on the company vision for a fraction of the cost of a full-time CFO. These fractional CFO’s can also help the company improve its internal accounting function or provide options to outsource a company’s accounting function to entities that specialize in accounting for middle-market companies.
If you are an owner of a company and would like to discuss how to leverage your time to
achieve your vision, please call me at (630) 240-1383 or contact me by email at
ABOUT THE AUTHOR
With 20+ years of senior management experience as a business owner, CFO, attorney, and engineer, Craig Beck can help you detect financial, legal and operational issues, determine how the interrelation of those issues may impact your business, and help you develop and implement a strategy to remove those barriers to greater success of your company. Understanding and helping achieve what’s important to you and your business is his priority at Beyond CFO. The main goal is to move things off your plate to reduce stress and help you leverage your most valuable resource - TIME. He works with owners of privately-held, middle-market companies, providing on-demand, as-needed, long-term support as a financial-minded business partner to increase the value of their business.