Accounting and finance are two commonly used words to describe functions within businesses. Let’s look at what they mean to small and mid-size businesses, some key differences between them and reasons why both are essential for long term success.
The most important point however for any small and mid-size business is a solid, intentional balance between the two.
A company weighted too heavily on accounting will be very reactive, making decisions on events that have already occurred and unable to alter results quickly.
A company weighted too heavily on finance will have wide variability in its forecasts, with little to no measuring stick to compare against, not to mention the risk of compliance issues.
What is it? Accounting is the recording, maintaining and reporting of a company’s financial information, or more simply, it describes where money came from and where it went over a period of time.
History – By definition, accounting is historical in nature, it is rear-looking and provides for a static snapshot of the business at a point in time. A P&L and Balance Sheet are exactly that, examples of a snapshot that accounting provides.
Compliance – Accounting services a key role in compliance for businesses. For anything from income and sales taxes, audits, stakeholder requirements for banks and investors and certainly for an eventual sale of a business, having logical, supportable records is essential to maximize benefit and avoid trouble.
Accuracy – In the same vein, a focus on accuracy is very important with accounting. Estimates are certainly part of the process, but a good general rule is to ensure accounting records are as accurate as reasonably possible given the size, resources and goals of the company.
Context – Accounting provides context for a business. It is often a baseline for the future and can be a key component of decision making.
What is it? Finance is the management of the resources of the organization to meet its objectives, or more simply where money will come from and will go.
The Future – In contrast, finance is forward looking, it is proactive and looking ahead. Forecasts, pro formas and budgets are all examples of financial tools. They are an attempt to look ahead to a point in time, weeks, months or even years ahead.
Outcomes – A key focus with finance is on outcomes, the “what if’s” based on decisions or events that affect a business. While the goal is to get as much precision as possible, the focus in finance is around reasonable possibilities, not perfection.
Needs – Finance includes a focus on how much capital a business will need and how much it will generate in the future. All small and mid-size businesses have finite resources, so making a well-informed decision on where/how to grow is key, and that can involve making difficult decisions between options based primarily on forecasted expectations.
Companies are naturally stronger in one of these areas given its personnel, systems, and business model. Many of the accounting and finance deliverables needed for a Fortune 500 company are not relevant for small to mid-size business. So, a key best practice is achieving the right blend of accounting and financial information to provide much needed visibility for company management and their needs over time.