difference between finance & accounting
Mother: Chinmay, I met Sita (name changed) after a long time who runs her own business. I gave her a copy of your book and told her that it will help her in her business.
Me: Ma, you still haven’t read my book.
Mother: it doesn’t matter. I know people to whom I had given your book have given very good feedback and some of them have gifted it to others.
Me: (with folded hands) ok, my book ambassador.
Mother: Sita was asking if you help business owners in setting up some accounting system or software? She was saying something like Tally…
(before she could complete the sentence, I asked)
Me: what did you say?
Mother: I said ‘yes’
Me: Nooo
Mother: why? I thought you do accounting, finance, and those kinds of things.
Me: ahh… ma, I do not think you will read my book. So, let me tell you one of the things that I have mentioned in the ‘Introduction’ of the book. Just before Chapter-1
Mother: ok… go ahead
Me: Finance is not accounting, and accounting is not finance. They are not the same!
Mother: really?
Me: (took a deep breath and said) yes!
Mother: so, what should I tell Sita?
Me: If possible, please share this football analogy. You know the game I am talking about right?
Mother: yes, the game where people kick the ball between two poles.
Me: exactly! Now, let us understand the difference between finance and accounting using football as an analogy.
Mother: ok
Me: In football, the aim of the game is to score more goals than the opponent.
Mother: yes
Me: In business, the aim of the game is to make more money than it spends.
Mother: hmm… yes
Me: In football, when a goal is scored, it is recorded by a ‘scorer’.
In business, when a financial transaction happens, it has to be recorded.
Mother: financial transaction?
Me: Please relax! Hold on, and stay with me because from my experience many people hear ‘financial transactions’, they immediately switch off and go blank.
I am sure this will comfort you. There are only four types of financial transactions that can happen in any business. They are:
Money comes in.
Money goes out.
Money is supposed to come in.
Money is supposed to go out.
Mother: oh… yes, I have heard you say this many times.
Me: good, now, whenever one of the financial transactions happens, it has to be recorded. It is not an option. And the person who records this is known as a bookkeeper. But sometimes people refer to them as ‘accountants’ but technically, this process is called ‘bookkeeping’ and the person who does it should be referred to as bookkeeper. I have seen in Australia people are more familiar with this term (bookkeeper), compared to people in India.
Mother: ok
Me: I believe your friend Sita might not have a system to track all the financial transactions and that is why she was enquiring if I could help her.
Mother: not sure.
Me: anyways, if the scorer is not keeping the scores properly in the game of football, will we know if a team is winning or losing?
Mother: no
Me: Similarly, when all financial transactions are not recorded or are not up to date, how can we possibly know if a business is making a profit or a loss?
This is a common issue I find with most small to medium businesses. They do not record financial transactions properly, as they have a part-time bookkeeper, or they try to do it themselves, leading to inaccurate recording keeping.
Now back to football. There is a person called ‘referee’ who is supposed to make sure the players abide by the rules of the game and there is fair play.
In business, this role, to a far extent, is played by an ‘accountant’.
AcCOUNTants: They count all the financial transactions and make sure that our business abides by the rules set by the taxation office.
[Now, I have to mention this, as many accountants may feel offended if we just relate them to referees. Accountants also help in registering a business; they give tax advice, structure a company, and sometimes offer business consulting services. But for laymen, the definition of a good accountant is someone who is going to help them pay less tax. So, I believe one (accountant) needs to clearly mention the role they would be playing with their respective clients through the accounting services they offer.
As mentioned in the disclaimer my intention is not to offend any profession or professional]
But what surprises me is this: we will not find a football player asking the referee where to kick the ball. Unfortunately, in business, people in business are over-dependent on their accountants and want them to tell them the score and/or tell them how to make a financial decision.
Mother: interesting
Me: When I bring this up in my programs, most people take a deep breath and lean back with their chin upwards. Then they ask me, “Chinmay, is there a difference between accounting and finance?”
My simple answer is YES! There is!
Finance is not accounting, and accounting is not finance.
In football, before the players kick the ball, they know, at the back of their head, the exact score and time (NUMBERS). Only then they decide to either pass the ball to the next player or go after the goal. This decision is based on numbers, and the intention is to win.
Mother: makes sense.
Me: In business, when we are making decisions, do we know how it is impacting the bottom line (PROFIT)? Or are we just kicking the ball because someone asked us to kick it in some direction or do we believe with our ‘gut feeling’ that the action will help us win?
Many times, I find business owners running all over the ground being busy just for the sake of being busy.
This is one point I emphasize over and over again: when we and our team are making a decision, to a great extent, we should know how it is going to impact the bottom line.
Mother: ok
Me: when I say, “I’m a financial educator”, what I mean is I educate people to read the scoreboard (financial reports) with ease and accordingly make decisions based on facts not assumptions, and know how those decisions are going to impact the bottom line.
Mother: hmm… so the bottomline of this conversation is, you are neither a scorer nor a referee. You are a financial educator who educates people on business numbers so that they make profitable decisions.
Me: Genius! I couldn’t have said it better…
Mother: I know
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If you are a business owner: is your business scoreboard (financial statements) accurate and up to date?
Or are we playing the game without knowing the exact score or situation, and hoping our efforts and decisions are going to help us win (make a profit) month on month?
Remember, hope is a good thing to have but not a good strategy to run a business!
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