Both finance and accounting deal with the science of money. However, finance involves active planning and making decisions about how to source and use capital, while accounting organizes and tracks information about transactions that have already occurred. In a sense, accounting provides the basis for finance because you need to know how much money you have and how you earned and spent it to make sound financial decisions for the future.
Why You Need to Know About Accounting and Finance
The better you understand what is going on in your business financially, the better you can plan for the future. Small-business accounting gives you a picture of how much your company has earned and spent, and if you are profitable. This information is necessary to make informed financial decisions. If your company is spending more than it earns, you need a source of capital to stay afloat, and usually to make downward adjustments to your current spending patterns. A good working knowledge of finance helps you decide when and if you should borrow and to strategize a workable repayment schedule. Understanding basic accounting gives you tools to see what is working and not working about your current business model.
Hiring Finance and Accounting Professionals
It is not necessary to hire professionals to help you with business finance and accounting, especially if you have some degree of financial literacy. Eighty-one percent of small-business owners do at least some of their own bookkeeping and finance. It is necessary, however, to keep your books accurate and up to date enough to provide the accounting information that will help you to make smart financing decisions. If you are unlikely to keep your records up to date or you don't have the knowledge and skills you need to do the job well, it's a good idea to seek professional help. Accountants and financial advisers don’t come cheap, but you can make costly mistakes doing your own books. Even if you have looked after your own records for some time, it is a good idea to hire an accountant and a financial planner before taking any major financial steps such as buying a commercial property or signing a commercial lease.
Finance and Accounting in Business Projections
Cash flow projections and pro forma income statements use elements of both accounting and finance. Solid predictions of future business income should be based on information from past accounting records. For example, if your books tell you that you have spent 33 percent of your gross revenue on materials, you can project this same percentage for future financing calculations, unless you have found out through research data that these materials' costs will change.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.