Differences/Confusion of Accounting and Finance
As someone who has spent years in consulting and coaching, I am often amazed how people confuse accounting with finance. While they both deal with the ‘numbers,’ the two are distinct fields with different skill sets and goals. Accounting is about recording and reporting financial transactions, while finance is about making decisions about how to allocate resources to achieve business objectives. One is history-based; one is future-based.
Rear View Mirror Vs. Windshield
Most of the time you drive looking forward out of the windshield. Periodically, you look out of the mirrors to see what’s behind you. Consider while driving in your car, how successful would you be continually looking out of the rearview mirror – the roads twists and turns ahead of you but you are driving referencing what is already passed. There is a role for each, in driving your car, but successful driving requires both a good, solid view backwards accompanied by steady anticipation (steering) of what’s coming ahead. Perhaps this is a poor analogy; hopefully not. Accounting and finance co-exist, and are used in different situations.
An additional difference between accounting and finance is the focus of each field. Accountants are primarily concerned with recording and reporting financial transactions. They keep track of expenses, revenues, and other financial data, and use that information to create (historical) financial statements. These statements are used by investors, regulators, and other stakeholders to evaluate a company's financial health. Finance professionals, on the other hand, are focused on making decisions about how to allocate resources to achieve future business objectives. They analyze financial data to identify opportunities for growth, and make recommendations about investments, financing, and other strategic decisions. Good financial decisions are predicated on good accounting practices.
A further difference between accounting and finance is the skill set required for each field. Accountants need to be detail-oriented and able to work with large amounts of data. They must be able to follow complex accounting rules and regulations and have a strong understanding of financial statements and reporting requirements. Finance professionals, on the other hand, need to be analytical and strategic thinkers. They must be able to analyze financial data to identify trends and opportunities and make recommendations based on that analysis. They also need to be able to communicate their findings and recommendations effectively to stakeholders outside of the organization.
Despite these differences, many people still confuse accounting and finance. This can lead to misunderstandings and miscommunications, which can have serious consequences for businesses. For example, if a finance professional recommends an investment based on faulty accounting data, it could lead to financial losses for the company. Similarly, if an accountant fails to report a financial transaction correctly, it could lead to regulatory violations and fines.
Success in business requires an understanding of both accounting and finance and an appreciation that they serve different needs. Just as you cannot successfully navigate a curvy road by looking in your rearview mirror, you cannot navigate a complex business world simply reviewing financial statements; they are simply an indicator of where you’ve been. Finance can become your windshield to help you navigate the future, even with its curves.
