Rose Report: Issue 22

Forwards and Backwards: Finance vs. Accounting

issue22-pic-story2Accounting and finance both deal with money management, but there are distinct differences between the two disciplines. Accounting looks backwards at the work already done, whereas finance looks ahead with projections and helps with planning.

While the two go hand-in-hand, it’s important to make sure your company has both covered. Accounting provides a strong history of an organization’s success by keeping track of transactions, credits and debits, and monitoring the company’s day-to-day operations. Accountants use balance sheets, profit and loss ledgers, and cash flow statements to determine financial results from operations. Accounting is not in real-time, so by the time the information is received, it’s somewhat dated. That’s where finance comes into practice.

Financial analysts look to accounting information to assess financial performance. They check cash flows, inventory levels, debt levels, and gross margins to determine a strategy for improving financial performance based on performance reports, risk analysis and estimated break-even points. Finance analysts propose future changes to improve margins and profitability, and then project outcomes based on these changes.

It’s important for a company to have people with both of these specific skill sets to assist in decision-making. While one may have very strong accounting and record-keeping skills, he or she may not know enough about finance to make projections and interact with banks and investors and vice versa. It’s harder to find a single individual who can consistently do both, says Rose Financial Services president, Ted Rose.

A good accountant should be detail-oriented, follows schedules, understand systems and enjoys more routine-type work. A finance person should have excellent Excel skills, a financial modeling background, and the ability to work with banks, financial institutions and investors.

While it may be difficult for a company to hire two individuals, there are options to make sure both grounds are covered. Depending on the size of the company and its priorities, some may bring in a part-time CFO to help with the forward-looking strategy. A good CFO should partner with the CEO to convert business strategy into a financial plan, and then help operations execute on that plan.

However, while it’s important to find individuals who have the particular skill set required for a finance or accounting job, more and more need to have an understanding of the other’s position, according to Forbes. It’s important to be more than just a “number-cruncher” but to gain some expertise and leadership so the two parties can work collaboratively and efficiently. These extra skills can be gained with on-the-job training, mentoring, and by offering continuing education courses.