Those aren’t the same thing?

Most people are perpetually confused about the distinctions between accounting and finance, “Those aren’t the same thing?”  Not really, but they are symbiotic. To make things simple, accounting looks backward, and finance looks forward. Yep, that’s it. 

Put another way: Accounting is documenting what you’ve done; finance is planning what you’re going to do.

But don’t worry, mommy loves everybody the same. Yes you need both and you can’t do one without the other.  Looking forward is about making educated guesses and defensible decisions based on things you’ve seen in the past. You need to record the past accurately and understand where you’ve been in order to do so. 

Let’s start with the role accounting plays in the health of your business, shall we? Proper accounting not only lends itself to things like proper taxes, you can’t truly understand what’s going to happen in the future without truly understanding what’s happened in the past. So if the past hasn’t been recorded correctly, then you have a much higher probability of basing your decisions on incorrect information. Which can be disastrous. 

Say you accidentally record a sale of the wrong product, you might think you had an unbelievably successful month when, in reality, you didn’t. This may lead you to invest more resources in that product…. And so on, and so on. Not good.

Keep in mind that the relationship between accounting and finance isn’t linear. You don’t have to wait until the accounting is done to make decisions on finance. Here’s an example: We close the books at the end of the month and get financials out, let’s say by the 15th. But if you already know things aren’t going well, you don’t need to wait until your books are closed to make changes to your forecast. 

What we don’t do is make changes to the past. (WE’D ALL LOVE THAT, I’M SURE… LOOKING AT YOU 80’s BANGS) We can’t rewrite history, but a lot of people make that mistake. They make some huge sales on January 31st but they want to record them on February 1st because January was already a strong month. It’s one day, who cares? ME! and here’s why. 

I can almost guarantee you will NOT remember that you decided to record those sales in a different month last year.  So next year, when you’re reviewing your sales, you may think you need additional resources in February or that you need to reset your commission structures because of seasonality, and that would be a huge mistake because you’re basing your future plans on false results. The idea is not to rewrite history to suit you better; the idea is for things to happen where they naturally do and for you to adjust your resources and forecast accordingly. 

I’ll leave you with one last key difference between accounting and finance, check this article out to see who does what. If you’re still confused on who to talk to and where to look, call me and I’ll help you sort things out. 


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