The terms financial management and financial accounting are subsidiaries of the word FINANCE.
Financial accounting and financial management are two separate functions of finance where financial accounting requires reporting past financial transactions. In contrast, on the other hand, financial management requires planning for future transactions. Before we see the difference between financial management and financial accounting, it is necessary to understand what finance is and these two functions.
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What is Finance Management ?
Finance and financial management are both centered around several business and governmental activities. The term finance refers to all the money-related matters of an organization, from budgeting, maintaining balance sheets, overseeing capital flow, investments, financial risks, etc.
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Financial Accounting vs. Financial Management: An Introduction
The fundamental difference between Financial Accounting and Financial Management is that financial accounting is the process of recording, maintaining, and reporting the company’s financial affairs that depict the company’s clear financial position. In contrast, financial management refers to managing finances and investment opportunities of different individuals, organizations, and other entities.
Now, let’s begin to learn the difference between accounting and financial management. But before that, it is essential to know in detail what these functions are.
What is Financial Accounting?
Financial accounting is the process of measuring, processing, and recording financial transactions of an organization. The primary objective of financial accounting is to report financial information or transactions using GAAP (Generally Accepted Accounting Principles). The task involves summarizing, analyzing, and recording such information and reporting it to the management, creditors, shareholders, investors, and oversight officials.
For business accounting, the double-entry method is commonly used. For every transaction, there will be a credit and debit entry. Whenever there is an increase in assets and expenses, it will be recorded as a debit entry. It will also mention a reduction in income, liability, and equity. An opposite of these will be written on the credit entry. For a single transaction, both these entries must be equal. This type of accounting helps in avoiding any human error and clearly shows a company’s position.
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Certain sole proprietorship businesses may use the single-entry system of accounting. This method is straightforward in form and doesn’t need experts to prepare it. There is also no need for software packages to do it properly. However, this is not a correct method as it does not show the actual position. It does not represent asset creation. Financial reporting is not possible with this way of entering transactions. Government agencies don’t recognize this type of maintaining financial records.
Accrual And Cash Accounting
There are two other types of accounting apart from what is mentioned above. The main difference between these two is the timing of entry. In cash accounting, only transactions where cash exchange has happened are recorded. This transaction can either be paid by cash, cheque, or bank transfer. What is required is for a buyer and seller to exchange money or instruments. If work is completed this month, but payment will be received only next month, the sales will be recorded only next month when payment is actually received.
The accrual method records all transactions immediately, whether payment has been made or not. Most big corporations use this method because it shows a more realistic financial picture for a particular period. However, this method will not show actual cash availability as these entries don’t represent any money exchange. But companies can better know what money they can expect and what payments must be made. Those who attend finance management courses will learn more in detail about accounting and financial management.
Functions Of Accounting
Why does a company need financial accounting? What are its main functions, and how do they help an organization? To know these, one must have detailed knowledge about what roles an accounting department plays. Every company will have a financial accounting and financial management department. Let us see what this accounting department does.
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Manage Payables
Payables are amounts that a company owes to various entities. They can be both external and internal payments. External payments will include those made for purchasing multiple items. Not everything is bought by paying ready cash. Those that are paid later will be listed under payables. The accounting department ensures that these are correctly recorded, and all suppliers and service providers receive payment on time. It will help maintain good relationships with vendors and also improve a company’s reputation.
There are various payments to be made inside a firm too. The main item under this is salaries. There are also other payments made to employees. All companies will try to make payments without delay because keeping employees happy is essential for their working with utmost sincerity. Accounting departments will also try to reduce costs and purchase prices of various items. This will help to improve a company’s profitability.
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Collecting Receivables
This activity is the exact opposite of payables. In this function, accounting departments will collect money from debtors. They must track payments that customers must make for getting products or services. A regular follow-up on this is essential for getting these amounts on time. Accounting officials must prepare invoices and send them to buyers on time to receive payments promptly. In some companies, they follow up with customers directly or through sales teams for payments. The role of financial management in accounting is to ensure regular updating of receivables statements.
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It is essential to collect such payments on time because that is the only source of revenue for a company. It is possible to automate this activity. Automation will lead to better cash flow. There will be more accurate data. This will also reduce credit risk and reduce the sales to payment cycle time. While studying the difference between financial management and accounting, accounting prepares the necessary statements to help finance managers ensure enough cash flow.
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Payroll Management
This is yet another vital function of officials in charge of accounting. Calculating salaries and paying them on time will result in satisfied employees. This must be calculated accurately after checking deductions. Companies may also need to pay overtime and other additional amounts to workers. They must prepare an accurate statement of all payments that the company must make to employees. It must also include any time off that employees have availed. Salary advances already received are also mentioned in this statement.
The accounting department will seek assistance from human resource staff members in this matter. Installing payroll software is an excellent way to perform this function without any mistakes. This will save a lot of time. It is this department’s task to calculate and deduct income tax from employees where it is applicable. They must ensure that the company remains compliant with all tax rules. Firms must also pay a bonus to those employees who are eligible for it. The accounting department must also provide statements giving details of earnings and deductions to staff members.
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Inventory Cost Control
Controlling cost is a vital function that the accounting department performs. Inventory refers to those items that are in stock. These have neither been used for production nor sold to customers. This means that these items are dead investments that don’t get any returns. But keeping a certain quantity of raw materials and finished goods is necessary to ensure customer satisfaction. There must be a balance between reducing inventory costs and ensuring order fulfilment.
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The accounting department must keep a close eye on such materials and ensure they remain at optimum levels. This will ensure lesser costs for the company and improved profits. They must regularly coordinate with production and supply chain managers to see how best to control inventory costs without affecting production and order fulfilment. These officials must make payments for all those purchased items and ensure that suppliers remain happy.
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Maintaining Records
Bookkeeping is a critical responsibility of this department. Accountants must maintain a record of all transactions performed by a company. This record is essential because government agencies will check this periodically. Companies must keep accounting records up-to-date and be ready for inspection at any time. Both internal and external auditors also inspect these. It is proof that the firm is using money properly without any deviation.
Maintaining the books properly also helps when it comes to tax calculation. If all records are up-to-date, it is easy for tax experts to calculate tax and suggest ways to reduce its burden on the company legally. Regular recording of transactions is a way to handle disputes regarding payment either with customers or suppliers. This exercise also enables easy reconciliation of various accounts.
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Budgeting
Budgeting is essential for every company. Without this, it will be impossible to manage all expenses. Companies must know what income they can expect and plan their expenses on that basis. It is the accounting department that will collect information from various other business units and make a budget. This exercise will help organizations to meet their routine expenses and reserve funds for long-term projects.
While both financial management and financial accounting departments are responsible for this job, accountants do the actual budgeting. The accounting department will coordinate with various other unit heads and find out what revenue they expect. They will also determine what resources these different business units need and make a budget based on priorities. Budgeting is a process that makes companies stay within their spending limits and not go overboard with spending and land in a debt trap.
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Reports And Statements
Various statements and reports help companies to function efficiently. Of these, financial reports are critical because they can give an idea about what spend can be done. The accounting department is responsible for preparing various financial statements used by company heads to plan future action. From these documents, it is possible to know what amount is available for expansion and growth activities. This is a job that is jointly done by the financial management and accounting departments.
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Statements like balance sheets, cash flow statements, and income statements are some of their reports. The accounting department can also prepare detailed documents about returns earned by each department. This will allow an organization’s heads to make changes if some business units are not as profitable as expected. It is also possible to know how successful different projects were. These statements and reports are also helpful for companies when they approach lenders for additional funds.
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Taxation
Every business organization must pay taxes. Companies must pay different types of taxes periodically. They must also collect taxes from employees and pay them regularly. There are also other levies that they must pay to remain compliant. GST is another levy that every company must pay. It is also essential to prepare a detailed GST statement and submit it periodically. The accounting department does all these.
These professionals don’t just prepare tax reports and pay them. They also look at ways for companies to mitigate taxes legally. Manufacturing companies must also compile excise duties and pay them regularly. Those companies that are importing or exporting goods must also pay duties. Companies must make all these statutory payments without delay or failure to ensure that they don’t attract any punishment.
Beneficiaries Of Account Statements And Reports
We have seen that an essential duty of the accounting department is to prepare various statements and reports. But, what purpose do these serve, and who uses them. Managers of different departments and company owners use these reports for making better business decisions. Department heads can know how their teams have performed and what contribution they have made to the company’s progress. It will help them improve their weak areas.
Business owners have great use for these reports. It is from this that they understand the source of money and expenses. They will know how much profit the company is making and whether there is any scope for improvement. Company owners and shareholders must know whether the managers they have handed over responsibilities are doing their job well. Accounting reports are beneficial for this purpose.
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Many people outside a company also study these reports for various purposes. Prospective buyers or those interested in merging this firm with theirs will undoubtedly go through these reports very minutely. Lenders will want to see how a company is performing before they extend any advances. Accounting statements are beneficial for this purpose. Government agencies will go through these to ensure that a company is only doing business as per regulations.
With so many reports and statements to prepare, accountants will need the help of tools that can automate many processes. Let us see what automation is and how it helps accounting work.
Automation In Accounting
Automation in accounting can be done quickly with the help of good accounting software. Such a package will perform all duties of an accountant and leave humans to perform more creative tasks. Accounting software provides a lot of benefits for companies and those working in that department.
Save Time
Maintenance of accounts is a laborious process that can take up a significant amount of time. Bookkeeping needs every transaction to be entered in detail. Even preparation of various statements and reports can be time-consuming without software support. Automating can save a lot of time and free people to perform other work.
Reduce Errors
Humans are prone to make mistakes. This is especially true with repetitive work. When copying a figure from one record to another, there can be mistakes. This can cause many problems when tallying accounts. It is also possible that some entries are entirely missing when doing manual work. A software will prevent such costly mistakes and ensure that records are in order.
Ensure Consistent Process
Accounting software will make sure that only one method is being followed. Even if a new person comes in place of another, there is no need to worry about changing procedures. A software will ensure that the same process is continued irrespective of who is doing the job. Having a consistent procedure helps in creating reports that everyone can understand.
Access Anywhere Any Time
Cloud-based software will allow anyone with permission to access accounts anywhere at any time. When someone is sitting with a customer, it is possible to check accounts and give clear answers about pending amounts. Any disputes about payments can be immediately settled because details can be accessed even from a mobile phone and shown to the other party. It allows all stakeholders to check financial transactions at any time.
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We have seen what accounting is. Now it is time to understand in detail the other subject of this article – financial management.
What is Financial Management?
Financial management assists in managing the finances and economic resources of the organization. It is concerned with managing the economic activities of the organization efficiently in order to achieve short-term and long-term financial objectives. It also aids management in better financial and investment decision-making.
The main objective of financial management is to generate wealth for the business and investors, earn cash and up to par returns at adequate risk by using organizational resources efficiently and effectively. Financial managers are an integral part of the top management who make policy decisions that involve money. Various strategies like new projects, marketing campaigns, expanding business to new markets, etc., are decided only in consultation with the finance manager.
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Duties Of A Finance Manager
So what does a finance manager in a company do? They are responsible for the financial position of a firm, and they are part of any major decisions. These professionals must ensure that their organization is financially stable and that it doesn’t suffer for want of money. Let us see what duties finance managers must perform.
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Assess Capital Requirements
A finance manager starts working even before a firm has started functioning. These professionals must first ensure that it is viable to start this company. Once that is done, they must find out how much capital will be required for starting and operating it. There are various requirements like machinery, office, factory, furniture, and people. All these cost money, and it is the financial manager who must assess and make necessary arrangements.
When looking at a comparison of financial management vs. financial accounting, one can see that accounting work starts only after a company has started functioning. But financial management begins even before that. It is not enough to arrange for capital at the beginning. Companies need money periodically for various new projects. They also require a fresh infusion of capital for expansion. An assessment of all these needs is made by a financial manager.
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Decide Composition Of Capital
When a company starts, there is a particular amount of capital available with the promoters or owners. The balance amount must be raised from different sources. It is this amount that financial managers assess. But their job doesn’t end there. They must decide on the composition of capital for a company. It is their duty to decide what kind of proportion of owners’ funds and that sourced from outside is ideal.
The capital of a company can come from various sources. A financial manager will decide what percentage of funds will be from what sources. That decision is taken after considering which will be most beneficial for the company. Companies generally go for bank advances, public issues, or funding from other interested parties. Sometimes they also seek other companies to invest in them.
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Source Of Funds
Companies need money periodically for various purposes. When the business is growing, it will need to invest in additional machinery. Organizations may want to open new branches in other places to expand their sales. All these cost money, and they must look for funds from some source. Companies will not have enough surplus to finance all developmental programs. There are various places from which money can be received.
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Finance managers must make a wise decision about where to receive additional funds from. This is another difference between accounting and financial management. Accounting officials are not expected to search for funds. Financial managers are responsible for finding the best source that will be best for a company. They must also look for the right time when lending is not very expensive. They must also try and get as much time for repayment as possible.
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Disposal Of Surplus
When a company makes a profit, this can be utilized in various ways. This is called the disposal of surplus. It is a call taken by the finance manager along with business owners and other chief officers. The net profit is first calculated after considering all expenses and payables. This amount can be used either for expansion or for distribution as dividends.
For companies with a limited number of shareholders, it can be distributed among themselves on the basis of their investment percentage. For public companies, the profits can be given to shareholders as dividends or as additional shares in the company. If there are expansion plans, companies may decide to use the surplus funds for that purpose.
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Managing Cash Flow
Cash flow refers to how money is earned and how it is used in a company. All firms incur different types of expenses. They must pay salaries to employees. Rent for buildings must be paid regularly. Money is also needed for the purchase of raw materials. Production of finished goods also costs money like electricity, machinery maintenance, and consumables. They must also necessarily pay all government levies and taxes.
Though the accounting department may prepare budgets, the final decision on spending will come from finance managers. This is one of the differences between financial management and financial accounting. Finance managers will decide how cash will be used. When there is not adequate cash to pay for everything, these professionals will prioritize and postpone some of them to later. They will check with various departments about expenses before making a final decision.
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Acquisitions And Mergers
An important work of financial managers is to look at ways to expand a business. Two good methods of expansion are acquisition and merger. Companies can buy other firms to improve business. They can buy a raw material supplier for better control. It is also sensible to buy those who are making similar products. This will help get rid of a competitor. Some companies also acquire others who are making products that can be sold along with existing items.
Merging with other firms is another way of expansion. In this way, the merged entity will be much bigger and have more control over the market. In the cases of mergers, both companies will have a say in how the new firm must be operated. The balance of power will depend on which firm is bigger and more strong financially. The benefits of such a merger will be keenly analyzed by financial managers, and the best course will be decided.
A profession that requires one to have as much both internal and external data cannot work without the aid of modern technology. Scientific advancements have helped financial managers to improve their efficiency greatly. Data analytics is one such technology.
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Use Of Data Analytics In Financial Management
While looking at financial management, it is worth seeing how the latest technologies are affecting its function. While many software packages are helping financial accounting, advanced sciences like data analytics are starting to support financial management. Analyzing existing and past data helps financial managers make better decisions on various matters. Analytics experts can use both structured and unstructured data to find insights that enable them to perform better.
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Structured data is that which is generated within a company. But there is much information outside that can be analyzed for various purposes. This is called unstructured data. There are large amount of transactions taking place across this world. Data generated from these exchanges can be used for predictive analysis that will help make better financial decisions. A lot depends on how this information is gathered, sorted, and analyzed. Only with expert handling can there be any benefit for an organization.
Better Stock Market Insights
Stock markets are a favorite investment option for many individuals and companies. Many mutual funds and insurance companies invest in stocks. Data analytics is helping them get real-time insights into this. Analytics doesn’t just analyze stock prices and movements. It also takes into account various other factors like political climate, global investment scenario, etc., to provide valuable insights.
Fraud Detection And Prevention
Almost all frauds involve money. It is crucial that companies are able to protect themselves from these elements and ensure their money is safe. Analytics can find people’s purchase patterns. If there is a change in that, credit card companies can get an alert and immediately block any further payments. This will protect companies and cardholders.
Better Risk Management
Risks are part of any business. Nobody can accurately predict what dangers await a business in the future. But it is always best to be prepared, and risk management helps to do that. Analytics is an excellent tool for risk management because it can use earlier situations and predict what can go wrong in the future. This will help risk managers to get a more accurate picture of threats faced by a company and take adequate precautionary measures.
Improved Revenue
Companies are always looking to improve their earnings. Analyzing market conditions and arriving at solutions can take a long time if done in conventional methods. Analytics can be used to find out better revenue methods in a short time and make use of such opportunities without any delay.
Replace Manual Processes
Looking at a complete picture of all transactions can be a big headache if done manually. This is especially a fact with credit card companies. Data analytics is replacing this and making the process much quicker. Companies can now see all transactions on a real-time basis and speed up processes. Manual processes can be replaced using analytics to improve customer satisfaction.
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Financial Accounting vs. Financial Management: Key Differences
Here is a cumulative list of differences between financial accounting and financial management. There are many ways in which one can distinguish between financial accounting and financial management.
- Financial accounting is primarily focused on reporting, whereas financial management involves the assets and resources of the company and their effective utilization.
- The main objective of financial accounting is to provide financial information using standard procedures and rules, whereas the main objective of financial management is to create wealth, cash, and returns by effective use of the company’s assets.
- Financial accounting reports the financial information to the management, creditors, investors, analysts, and regulators, whereas financial management is used by the management of the company to forecast its future.
- When asked what is the difference between financial accounting and financial management, one can say that the former is about past transactions and the latter is about future plans.
- While financial accounting reports on how money has been used in a company, it is finance management that decides how it must be used for the best benefits of a firm.
- The main purpose of accounting is to record all financial activities and present them in a way that everyone can understand. Finance management uses this data to make important decisions about future business activities.
- Reports of accounting are a summary of financial transactions while management prepares detailed reports on future courses of action.
Why Seek A Career In Finance?
There are a lot of discussions on financial accounting vs. financial management and which one is a better career option. What one must understand is that both are related to finance and can be exciting and rewarding work for one who is qualified in this subject. Both of these jobs are important for a company. One can even change from one to the other. What is more important is to get qualified in the subject and gain good knowledge about it. There are a lot of benefits to taking up a career in finance.
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Potential For Good Earning
The main advantage of joining a career in finance is that it pays well. Compared to many other jobs at the entry level, this one pays much better. Moreover, for a person who is willing to work hard and smart, there are immense opportunities for growth, and this means better pay. An experienced person is always in demand, and there are enough jobs to switch and get paid more.
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Job Security
There is a close relationship between financial management and accounting, and this means that a person can do both jobs competently. So, a person qualified in finance can find jobs anywhere as both these jobs are important for any company. Even for closing a company in the event of loss or other issues, these experts are required. If there is an acquisition by other companies, also finance experts will be required to complete the process. There is excellent job security in finance careers.
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Get Regular Training
The finance field is rapidly advancing, and new techniques are being employed for better efficiency. New tools and technologies are also invading this area. This means that anyone working in finance will need to be trained regularly. Joining a career in this segment will give people an opportunity to be familiar with the latest applications and software. This will keep them updated and ready to take up any new job.
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Career Advancement Opportunities
Experience has a lot of value in finance jobs. The discussion of financial management vs. accounting doesn’t have much significance when it comes to advancing in a finance career. A person who is experienced in accounting can be put in a financial management position. As both jobs require similar skills, people can handle both jobs well. This offers a wider choice of career opportunities. The chances for moving forward in the existing company itself are very high. A higher position means better pay and an improved lifestyle.
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Better Job Satisfaction
People working in finance have been shown to have a higher job satisfaction level. This is because their job involves ensuring that a company functions well and successfully. It is the finance guys who make sure that companies run profitably. They help to save costs and increase earnings. This gives them the satisfaction that they are instrumental in running a firm successfully. Managing money is also highly satisfying because it is a commodity that drives growth and expansion in a firm.
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Maximum Career Options
The difference between accountancy and financial management doesn’t have much significance when it comes to career options. Both can be performed interchangeably by those qualified in finance. This means that they have a wide range of jobs to choose from. Finance managers and accountants are needed everywhere. This increases the chances of changing companies beneficially. Both these professionals can also take up various other roles in finance itself.
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A Challenging Career
A job in finance is no cakewalk. It is tough and requires one to use all skills one possesses. But it is the challenge that makes this profession a lucrative one. It is not easy getting departments to reduce costs. It is a tough job finding ways to decrease production costs. Talking to suppliers to get raw materials costs reduced can be highly challenging. These professionals need to be on their toes always. These challenges will keep a person active and alert, which is important for an exciting life.
Financial Accounting vs. Financial Management – Final Thoughts
Both these specialties are imperative for an organization in its own capacity. While both are part of finance, and there is a relationship between financial accounting and financial management, both have their own uniqueness that sets them apart from each other. While financial accounting revolves around reporting financial transactions, financial management is all about managing the company’s resources to manage future growth.
If you want to build a successful career in any of these domains, it is recommended to take up financial management online training. Scout the internet for financial management online programs, find a credible one that suits your budget, and begin your career in the field of finance. Financial management online training allows you to get hands-on knowledge about the key aspects of the financial world and helps you understand how to run this world effectively.
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