Key Difference Between Financial Management and Accounting

Introduction

In today’s dynamic business landscape, every company must have a clear, fair, and true understanding of their financial status. Accurate and updated data for accruals, expenditures, income, and bank balances are essential. These deep insights help businesses to not only track financial performance but also make strategic decisions and ensure accurate reporting. 

The two most critical tools for robust financial analysis and business performance are accounting and financial management. While these concepts may overlap, they have distinct roles and fulfill different organizational objectives. Accounting helps businesses track their financial position, whereas financial management helps manage and optimize the utilization of financial assets. 

This blog discusses the differences between financial management and accounting, its definitions, the objective of financial management, and how businesses can boost both using a record-to-report suite. 

What Is Accounting?

Accounting refers to recording, analyzing, interpreting, and summarizing the financial data of a business. It involves nuanced and systematic monitoring of financial transactions to prepare accurate and reliable financial reporting. This process enables informed decision-making and ensures compliance with regulatory requirements. Accounting is usually divided into three categories. 

• Financial Accounting

  Financial accounting involves preparing and reporting financial statements for external users like investors, lenders, regulators, and other stakeholders. The main objective of financial accounting is to help businesses record and summarize financial transactions and ensure compliance with financial reporting standards like Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). 

• Managerial Accounting

  Managerial accounting, or cost accounting, involves evaluating costs for operations and administration, preparing business budgets, and forecasting future cash requirements to support management decisions. 

• Tax Accounting 

  Tax accounting ensures compliance with tax regulations and laws and helps businesses optimize their tax-planning strategies. It includes calculating and reporting taxable income for companies and preparing tax returns to minimize tax liabilities within the boundaries of tax regulations. 

What Is Financial Management?

Financial management refers to tracking, controlling, securing, and reporting a business’s financial assets and resources. Companies usually have accountants or finance teams that manage their finances, including all bank and cash transactions, debts, investments, and other sources of funds. 

Financial management primarily focuses on helping companies make informed decisions for procurement, allocation, and effective use of funds to boost financial performance and business value. 

Objectives of financial management

The key objectives of financial management is to maximize wealth for businesses and investors, generate cash, and gain favorable returns while effectively using financial resources and managing risks. To achieve this, financial management uses three components: 

• Financial planning 

  It involves framing financial goals and building strategies to achieve them. It also includes forecasting financial requirements, budgeting, and creating a financial blueprint to guide operational activities. 

• Financial analysis and control 

  It is the most critical element of financial management. Financial analysis refers to assessing the financial performance of a business by analyzing financial statements and records. On the other hand, financial control involves tracking financial resources and ensuring they are optimized and used effectively. 

• Financing decision

  This involves making informed decisions to drive investment, financial options, better returns, favorable debts, and improved business performance. An effective financial decision not only helps secure good returns on investments but also helps distribute the gained wealth among shareholders and ensures better dividend payouts. 

Difference Between Financial Management And Accounting

While financial management and accounting look like complementary disciplines, their objectives overlap. Financial management helps a business plan and drive informed decisions through detailed accounting information, whereas accounting focuses on reporting financial information using GAAP rules. 

Here’s a snapshot of the difference between financial management and accounting: 

How Automation Helps Level Up Both Financial Management And Accounting

In the fast-paced business environment, traditional accounting and financial management practices not only consume the valuable time and resources of accounting and finance teams but also make the process error-prone and less reliable. Moreover, the manual accounting process makes it difficult to track and verify financial transactions, thereby affecting compliance practices and strategic decision-making. 

Automated accounting helps streamline financial functions, focussing on repetitive yet critical manual accounting tasks and enabling three-way matching. . These automations are mostly workflow-based, use highly customized templates, and allow finance analysts and accountants to focus on higher-value strategic tasks. Automated systems provide real-time financial data, customizable reporting dashboards, seamless integration with ERPs, and alerts for anomalies or discrepancies facilitating data-driven decision-making. 

Here are the key benefits of automation when it comes to accounting and financial management: 

End-to-end financial close automation

• Task-specific worksheets allow accountants and finance teams to complete tasks for each function and validate the completeness and accuracy of transactions. 
• Connected workspaces help accounting analysts to share their work for each general ledger (GL) account task category for review, approval, and application to decision-making. 
• Real-time visibility of tasks and automated journal entry posting to ERP ensure the entries adhere to compliance and audit requirements. 

AI-powered anomaly detection 

• Continuous data integration eliminates the need for accountants to export data files from source systems and import them into spreadsheets. 
• The AI-enabled anomaly detection provides a list of potential anomalies and errors that occur when posting GL entries to ERP. 
• Anomaly listing helps analysts to view all anomalies identified by the anomaly engine, making it available as a work list for the managers to take action on.
• Anomaly resolution offers automated corrective suggestions and adjusts journal entries to expedite the close process.

Account reconciliation management with automated workflows

• AI-powered matching gives accountants a set of existing matching rules or algorithms to reconcile any two sets of data, such as GL and a subledger or a GL and bank statement. 
• Automated reconciliation workflows help create account reconciliation project plans, assigning specific GL accounts to accountants to ensure timely reconciliations.
• GL account-specific reconciliation templates enable managers to use standardized templates or customize their own, speeding up the process of reconciling general ledger accounts.

Boost Financial Management and Accounting Success With HighRadius

To ensure accurate and reliable financial reporting and enhanced, informed financial decisions, accountants and finance managers need a disruptive approach to continuous accounting. HighRadius’ Record to Report suite offers AI-based anomaly detection, automated account reconciliation, and financial close solutions to eliminate manual month-end tasks and streamline month-end close review using LiveCube, providing real-time, single view of data sources without using spreadsheets. 

The financial close management solution include spre-configured tasks and project templates, creating highly-nuanced close plans with specific close tasks assigned to accountants, reducing the month-end close time by a remarkable 40%. Moreover, task-specific worksheets help companies complete closing tasks for each function, ensuring transaction accuracy and seamless and continuous close. 

AI-led anomaly detection enables continuous accounting with features like automatic posting of journal entries to ERP, error marking by the Anomaly engine, workflows for anomaly resolution, and corrective suggestions for anomalies. It also provides a list of potential anomalies that help in addressing issues proactively rather than waiting until the month’s end for adjustments. 

Lastly, Account Reconciliation Software identifies and resolves variances for general ledger accounts through configurable matching criteria and algorithms. Businesses can manage output transaction matching using LiveCube instances with only three sheets – matched items, unmatched items, and summary and perform reconciliation. Additionally, the worksheets within LiveCube automatically populate open or other line items from the unmatched items tab. LiveCube also provides an out-of-the-box formula set for creating templates to automate various transaction processing requirements for reconciliation. 

Results? A 30% reduction in days to reconcile, along with 70% of anomalies closed. 

FAQs

1) Does managerial accounting follow GAAP?

Managerial accounting does not follow GAAP. It offers flexibility to managers and accountants when preparing reports and gathering financial information. Managerial accountants prefer to calculate and create “what-if” scenarios to help companies make financial decisions and plan for future needs.

2) How does finance relate to accounting?

Despite overlapping objectives, finance and accounting complement each other. Accounting helps record transactions and prepare financial reports that adhere to regulatory guidelines. Finance leverages this report to make informed decisions and use assets effectively for better returns. 

3) What is the difference between accounting and finance?

Accounting is a part of the finance subset that focuses on managing financial data and transactions. Finance uses the accounting report to analyze financial performance and frame strategies to drive growth. While accounting analyzes the daily flow of money, finance helps a business plan for the future.