Business finance and accounting are two closely related activities in a company. Business finance — also called corporate finance — includes activities that help a company fund its activities and operations. Accounting is the process of recording and reporting financial figures from business transactions. The relationship between business finance and accounting exists because the former activity often uses figures from the latter. In other cases, business finance analysts review accounting information to determine the efficiency and effectiveness of operations.
A company often separates its finance and accounting functions among several workers. This ensures the company has the proper segregation of duties to prevent employees from manipulating information. The company also needs to create specific job responsibilities to further define roles. Large companies may also need to have two separate departments in order to process their financial data. In many cases, the finance department will have fewer employees than the accounting department.
Financial statements are typically the final output from a company’s accounting department. These statements present a record for a specific period in a company’s life. Business finance and accounting personnel work together to present the financial statements to upper management. For example, business finance personnel may review and make suggestions on correcting the financial statements. Business finance personnel may also create ratios in addition to statements to provide additional insight into the data.
Another relationship between business finance and accounting is the creation of a company’s budget or working capital analysis. Finance personnel often create budgets to present the expected financial outlays in the future. Accountants prepare information at the end of each month that affects current budgets. Finance personnel ensure the company maintains its budget and all figures are in proper accounts. Creating new budgets also requires the use of current accounting information.
Working capital analysis and other uses of accounting information also extend the relationship between business finance and accounting. Finance personnel must ensure the company has enough cash to operate. A mix of debt or equity financing is often necessary to overcome any cash shortfalls as computed by a working capital or cash budget. Without accounting information, these budgets and the related shortfalls are nearly impossible to determine. Finance personnel can also make other recommendations for working capital adjustments.
Other possible decisions that result from corporate finance include business valuation, investment decisions, and dividend planning. These decisions are all a working part of the relationship between business finance and accounting. Companies can also create other relationships based on their need for financial data.
What Is the Difference Between Accounting and Business Finance?
Some people may use the terms "accounting" and "finance" interchangeably. However, the two words refer to completely different disciplines. Learning the distinctions between the two can help you speak more intelligently on both subjects.
A Quick Introduction to Accounting
Simply put, the point of accounting is to record a business's financial transactions. More broadly, it also involves sorting, storing, retrieving, aggregating and presenting this information. The primary goal is to monitor and executive certain day-to-day financial activities, which involves seven important functions:
- Accounts payable and receivable
- Payroll and time off
- Inventory cost management
- Cash collection and transaction recordkeeping
- Financial statement and reports
- Regulatory compliance and financial control
A Brief Overview of Business Finance
Accounting and business finance are interrelated, but their focuses are quite a bit different. Business finance handles the overall accumulation and management of funds. Analysis, planning and control are all key components that contribute to decision-making. They guide a business's management in maximizing profitability and minimizing risk. Forecasting, budgeting and profit planning are also vital to business finance. Other common finance tasks include ratio analysis, which provides a picture of a firm's overall health:
- Liquidity: current assets ÷ current liabilities
- Accounts receivable turnover: total credit sales ÷ average AR balance
- Merchandise inventory turnover: cost of goods sold ÷ average inventory
- Total assets turnover: total sales ÷ total assets
- Return on equity: net income ÷ outstanding stock shares
- Asset turnover: sales ÷ total assets
Other critical ratios that financial analysts look at include the debt-asset ratio and debt as a percentage of total capitalization. These ratios, plus data and reports supplied by a firm's accounting department, provide the information that's needed for short- and long-term planning — functions that fall within the realm of business finance.
Why Are Accounting and Business Finance Important to a Business?
As mentioned earlier, accounting and business finance have a unique relationship. Finance relies on accounting data for its critical functions. You can think of it this way: Accounting focuses on the past and present, while business finance is more future-oriented. Accounting deals more with day-to-day operations, while business finance looks at the bigger picture.
While their focuses lie in different areas, both disciplines contribute to the health, stability and success of any business. Accounting functions keep track of both income and expenses. They also collect important information that shows how well the business is performing. The data gathered and processed by a company's accounting department also helps it complete yearly tax returns. Finally, reports using accounting data can also prove that a company is complying with state, federal and local laws.
The Importance of Financial Reports
You've already seen examples of how accountants' recordkeeping enables business finance's planning, forecasting and budgeting plus taxation and compliance tasks. Because companies are also accountable to their shareholders, they must prepare and distribute financial reports on a regular basis. Most businesses create four types of financial statements:
- Balance sheets: details assets and liabilities
- Income statement: shows money earned and spent
- Cash flow statement: reports incoming and outgoing cash amounts
- Statement of shareholders' equity: shows changes in ownership interest over time
Shareholders receive these financial reports, but so do many other entities. Lending institutions use them to evaluate a firm's creditworthiness. Publicly traded firms are also required to file these statements with the Securities and Exchange Commission. Some, such as the Walt Disney Company, offer these statements on their websites. Analysts and prospective investors can view them to evaluate the company's financial performance.