What Is the Difference Between Finance and Accounting?

What is the difference between finance and accounting? If you study both careers, you’ll find that one has nothing to do with the other.

They’re closely connected, but they follow different objectives and means.

But what does this difference have to do with you?

Well, if you want to make more money, you’re going to need both.

But which one should you pick first? Whether you hire an analyst or do everything yourself, this decision is the difference between losing and making money.

What Is the Difference Between Finance and Accounting?

What Is the Difference Between Finance and Accounting

Let’s start with basic notions. What do most people think when they hear these words?

Accounting?

  • Calculating expenses
  • Updating spreadsheets
  • Invoicing

Finance planning?

  • Researching the markets
  • Making and validating projections
  • Following the news to update business strategies

It looks like accounting is about managing money. And finance is about giving that money the best use to reach a goal. Typically, to make more of it.

Here’s a tough question. Would you choose Accounting to understand your current economy? Or boost your economic performance with finance?

Keep in mind:

  • Accounting can help you understand how much money you have and why. But it will never make you more money
  • And finance can potentially generate wealth. But you can’t make accurate projections without reliable accounting

First, you need to understand how you got where you are. And then, you choose where you want to get and how.

Yet, both are essential to make smart use of money, but each one takes a different approach. To better understand the contrast, let’s look at the following factors.

#1 The Goal

In the end, both careers are very similar: it’s all about managing financial information. But think about it: Why would an organization pay a professional who doesn’t generate any money directly?

Well, CEOs should still learn both careers. But you can’t focus on the business when you’re focused on the numbers. By hiring an accountant and planner for your team, you ensure everyone is doing the best job. Expecting to do everything perfectly by yourself is unrealistic, not to say overwhelming.

The same applies to personal finance. Why do most people hire personal accountants and financial advisors? Because money management can get complicated.

You don’t want to lose sleep worrying about your savings. Instead, you hire a professional you can trust.

Or perhaps you fear wasting all the money you saved. So you hire a financial planner to invest in the best way or at least preserve it.

If we had to summarize these goals with one question, it would be:

For accounting: Where are we financially and how did we get here?

For finance: Where do we want to be financially and how can we get there?

That doesn’t mean you can’t succeed if you only do accounting without finance. Or if you do finance without accounting. But it will be harder to grow and easier to make mistakes.

And when betting your lifetime savings, mistakes are worth avoiding. This leads to the risk question:

#2 Risk Management

What’s the risk of not doing accounting or financial planning? That’s the problem these professionals solve, and why both earn at least $68K per year.

I guarantee you they save you more money than what they cost. Here’s how:

An accountant ensures all financial information is accurate, so you can make better decisions.

Even with the best analytical skills, you can’t make money based on wrong information. It only takes a bit of accounting to prevent huge losses. And the more money you move, the bigger the losses can be.

When you run a company where many employees rely on you, you can’t afford these mistakes.

Accountants minimize the risk of material misstatement.

They study the past performance for an accurate representation. And that analysis also serves to detect areas of improvement and prevent repeating mistakes.

And to make the most out of your money, you’ll need some planning.

Financial professionals minimize the risk of projection misstatement.

They study the future performance to make projections as accurate as possible. And that analysis based on the knowledge they have about the industry and market research.

Without accurate planning, companies would never meet their projections. Which would defy the purpose of finance.

Of course, nobody knows the future. That’s why analysts run multiple projections with action plans for each case.

As for how they actually do it, that depends on the company.

#3 Activities

So what do these people do? To put it simply, communication and research.

  • Communication, because you need to keep the data updated (via team meetings).
  • Research, because you work with data (or in the case of accounting, documentation)

That’s why the first thought is to think of both careers as the same thing. What changes is how they operate:

On a typical day, the accountant starts by collecting new information. They take care of the billing, vendor invoices, booking, and expense accruing.

They then may meet with the executive team (senior accountant) to double-check the data.

When done, the company publishes this data, which is helpful for investors.

Financial planners also use this data for their forecasts. The first thing they do is review the previous projections:

  • Check the market news
  • Compare the latest reports with the projected ones

This feedback allows them to better forecast income and expenses. And once they finish the projections, they review and publish them. The CEO will make decisions based on this projection.

#4 Skill Set

Communication and research are key, but they aren’t the only skills. Each professional needs some technical knowledge on how to process information.

Accounting bases of quantitative research. It’s knowing which data to consider and which one to discard. And this precision depends on how you organize data.

A crucial skill is adapting to new information. Because accountants work with dynamic numbers:

  • You may register a sale, but the client may make a chargeback later
  • The company may have closed a deal, but the client hasn’t paid yet

When working for public companies, accountants need to learn about GAAP compliance (AKA Generally Accepted Accounting Principles). If every accountant of every company used a different accounting method, it would be impossible to compare each other.

The same problem affects the team. When you change the method, the results will change even when performance remains identical.

Assuming the data is correct, it’s then the financial analyst‘s job to forecast the performance. And to do so, one needs to understand:

  • The industry involved
  • How the company works
  • How the market evolves

Higher analytical skills lead to more accurate results. It also makes you capable of forecasting complex, seemingly unpredictable trends.

Which One Is Better?

Which One Is Better

It’s no secret that knowledge is power. And when it comes to money, you cannot afford not to do both accounting and finance.

As a career professional, finance pays a bit better than accounting. But they both help you increase your financial intelligence. Which improves your personal finance regardless of the salary.

As an entrepreneur, you want to specialize in your business, but also know a bit of everything. And this variety is essential for innovation. For example, losing money can be a launching strategy that financial planners may never understand.

As for personal finance, it’s recommended to hire both professionals as you increase your savings.

But if you choose to hire a planner, it’s vital to filter out everyone who’s not a fiduciary financial advisor.

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