What is the Difference Between Accounting and Financial Management?

Accounting and financial management are the two areas of finance that are crucial for any business to sustain and grow. In this article, we will be discussing what these are and how these two areas are different. 

Table of Contents

• Difference Between Accounting and Financial Management
• What is Accounting?
• Types of Accounting 
• What is Financial Management?
• Types of Financial Management
• Key Differences Between Accounting and Financial Management
• Similarities Between Financial Management and Accounting

Difference Between Accounting and Financial Management

Accounting is the process of recording, maintaining, and reporting the company’s financial affairs. On the other hand,  financial management is the process of managing finances and investments of different individuals, organizations, and other entities.

Further, these two are different based on the below-mentioned parameters:

What is Accounting?

Accounting is a process of recording business-related financial transactions. It involves summarising, analysing and reporting transactions that can be shared with tax regulating authorities. The financial information is reported using IFRS and GAAP. Principles of accounting and standards are set by different regulatory bodies including FASB, IRS and SEC among others. There are three main types of accounting. These include financial accounting, management accounting and cost accounting. Let us understand these types of accounting in brief.

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Types of Accounting

The following are the different types of accounting:

1. Financial Accounting

This branch of accounting deals with the preparation of company’s financial statements and financial reporting. Financial statements including cash flow statements, balance sheet and income statements are prepared. These documents are developed based on the guidelines of the standard that is being followed by the company. Say, a US company is preparing financial statements. The company will create this statement based on GAAP. If a country outside the US was preparing the financial statement, then the document would be based on the guidelines specified by IFRS.

2. Management Accounting

Also known as managerial accounting, this branch of accounting is specifically meant for managerial purposes. The management accounting documents are not disclosed to the public. Based on the details of management accounting, the company makes changes to policy so that business operations can become more efficient. There is no need to follow GAAP rules in the case of management accounting.

3. Cost Accounting  

It is a subset of management accounting where the cost of business operations is analysed and reported. Companies can identify the expenditure and how the cost can be reduced. It involves assigning costs to cost objects that may include products, services and business activities of the company. It involves bookkeeping, input analysis and system development. Through cost accounting, business strategies can be created organically.

What is Financial Management?

Financial management is the process of controlling the money in and out of a business. It is a process to handle a company's finances in such a manner that the business is successful while being compliant with legal regulations. The aim of financial management is to ensure that the company has sufficient funds to fulfil its obligations.  

Types of Financial Management

The following are the different types of financial management:

1. Strategic Financial Management: Focuses on long-term business strategies and decisions that affect the organization's financial health in the long run. It includes capital structure decisions, mergers and acquisitions, and long-term investment planning.
2. Operational Financial Management: Concerned with the day-to-day financial operations and management of a company. It involves cash flow management, inventory control, receivables and payables management, and budgeting.
3. Capital Budgeting: It involves evaluating investment opportunities and deciding which projects to invest in based on their expected returns and alignment with the organization's strategic goals. Techniques such as Payback Period, Net Present Value (NPV) and Internal Rate of Return (IRR) are commonly used.
4. Corporate Finance: It focuses on managing a firm's capital structure, financing decisions, and dividend policy to maximize shareholder value. It includes raising capital through debt or equity, managing financial risks, and determining the best distribution of profits.
5. International Financial Management: It deals with financial management in an international context, considering the financial implications of operating in different countries and markets. It includes foreign exchange risk management, cross-border investment decisions, and international financial regulations.
6. Public Finance Management: This involves managing the finances of government entities and public institutions, focusing on budgeting, expenditure control, and the efficient allocation of resources to meet public needs.
7. Personal Financial Management: Although primarily focused on individuals or families, personal financial management principles are applied in small businesses too, especially in managing personal finances, investments, savings, and budgeting strategies.

8. Risk Management: It identifies, assesses, and manages financial risks that could adversely affect an organization's financial health. This includes currency risk, interest rate risk, credit risk, and operational risk.

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Key Differences Between Accounting and Financial Management

1. Meaning:

• Accounting: It is a systematic process of recording, summarizing, analyzing, and interpreting financial information of an individual, business, or organization. It involves systematic and detailed tracking of financial transactions and events to provide accurate and reliable information for decision-making, financial reporting, and compliance with legal and regulatory requirements.
• Financial Management: It manages the finances and investments of different individuals, organizations, and other entities. It is about planning for future transactions.

2. Types:

• Accounting: It can be broadly categorized into four main types:
  • Financial Accounting: Focuses on preparing and reporting of financial statements for external users including creditors, investors, and regulators.
  • Managerial Accounting: Provides information for internal management to support planning, decision-making, and control.
  • Auditing: Involves the independent examination and verification of financial records, statements, and reports to ensure their accuracy and compliance with laws, regulations, and accounting standards.
  • Tax Accounting: Complying with tax laws and regulations, as well as optimizing tax planning strategies.
• Financial Management: It does not have such categorization.

3. Objective:

• Accounting: The primary objective is reporting the financial information or transactions using Generally Accepted Accounting Principles (GAAP).
• Financial Management: The objective is to assist the management in planning as well as decision-making through detailed information on different matters.

4. Rules:

• Accounting: It follows the rules of GAAP.
• Financial Management: It does not follow any fixed rules for the preparation of reports.

5. Reports:

• Accounting: It reports only financial aspects.
• Financial Management: It reports both financial and non-financial aspects.

6. Time Span:

• Accounting: Financial statements are prepared for fixed time period, i.e.,1 year.
• Financial Management: Management Reports are prepared whenever needed.

7. Publishing and Auditing:

• Accounting: Should be published and audited by statutory auditors.
• Financial Management: It is not meant to be published or audited. It is for internal use only.

8. Format:

• Accounting: It is governed by strict standards (like GAAP or IFRS), producing standardized financial statements (balance sheets, income statements, cash flow statements). Its format is precise and regulated, focusing on historical financial transactions.
• Financial Management: It adopts a flexible format, focusing on future-oriented financial planning and strategic decision-making. It involves budget forecasts, investment analysis, and financial strategy planning, not bound by the rigid formats of accounting.

Similarities Between Accounting and Financial Management

Accounting and financial management share several similarities that are fundamental to the operation of businesses and organizations. Here are some key similarities between the two:

• Record-keeping and Documentation: Both accounting and financial management require meticulous record-keeping and documentation of financial transactions. This ensures accuracy in financial reporting and decision-making.
• Financial Reporting and Analysis: Both fields involve the preparation and analysis of financial statements (income statement, balance sheet, cash flow statement) to assess the financial health of an organization.
• Budgeting and Forecasting: Accounting and financial management use historical financial data for budgeting and forecasting future financial performance. This helps in planning and controlling organizational activities.
• Compliance: Both disciplines are concerned with ensuring compliance with financial regulations, tax laws, and accounting standards. This includes the accurate calculation and reporting of taxes owed.
• Cost Control and Efficiency: Identifying areas to improve cost control and operational efficiency is a common goal of both accounting and financial management. This involves analyzing financial information to identify cost-saving opportunities.
• Strategic Decision Making: Financial information prepared by accountants is crucial for financial managers to make strategic business decisions, such as investments, expansions, or diversification.
• Resource Allocation: Both fields play a role in the effective allocation of resources within an organization, ensuring that financial resources are used efficiently and align with the organization's objectives.
• Risk Management: Accounting and financial management contribute to identifying, assessing, and managing financial risks, including credit risk, market risk, and liquidity risk, to protect the organization's assets and ensure its financial stability.
• Performance Evaluation: Both disciplines use financial metrics and ratios to evaluate the performance of the business, departments, or specific projects, facilitating the measurement of achievement against goals.