Startup - Accounting vs. Finance, what is the difference and who should I hire first?
What are the differences between finance and accounting? Often, finance and accounting functions are mixed together and performed by the same group of people, but that doesn’t mean they are the same. Let me explain how they are different and which one you need to grow your startup.
Finance and accounting 101
In a company, finance and accounting operate in different levels of the asset management spectrum.
What is accounting?
Accounting is the process of recording and reporting the financial information of a company. It is a snapshot of a company’s financial situation using past and current transactional data.
Typical activities are:
Recording transactions
Collecting financial information
Compiling reports
Analyzing and summarizing performance
Accounting related jobs:
Accountants: record financial transactions, create financial reports
Financial controller: the lead of the accounting department, is responsible for communicating and reporting the financial reports
CPA (Certified Public Accountant): a designation for accounting professionals who have passed certification exams and completed a set amount of required work experience. CPAs can review and sign off on financial statements.
What is finance?
Finance is the function of planning how to use capital for the future. It uses accounting data to project out returns on investments and assess investment opportunities.
Typical activities are:
Investing
Borrowing
Lending
Budgeting
Forecasting
Finance related jobs:
Financial analyst: analyze financial data, make financial models to assess future opportunities and assist in forecasting and budgeting
CFO (Chief Financial Officer): the lead of the finance AND accounting departments, is responsible for financial planning for the future. Many CFOs have an MBA degree with a CPA designation to indicate their management and communication skills and domain knowledge.
Fundamental theories behind finance and accounting:
Accounting:
Assets = Liabilities + Owner’s equity
Accounting records a company’s assets and liabilities, and the difference between the two goes to owner’s equity. Remember the total of the two sides of equation always have to balance.
Finance:
Cash is king.
Finance looks at how effectively a company generates and uses its cash, calculate the cash it’s able to produce and leverage in the future.
See the differences in the chart below.
Finance and accounting--which one do you need for your startup?
Early stage startups need someone who has both finance and accounting skills. Startup employees often wear multiple hats and work in different functions. An employee with both finance and accounting skills understands the historical data and can assess future investment opportunities. Admittedly, it is more expensive to hire someone with finance and accounting skills, however, these highly-skilled employees can help you reduce risks and save time, which is what you need in this highly competitive startup space.
