The Finance Gem 💎 #87 - Accounting vs Finance: Why the Difference Matters

^{Welcome to Issue #87 of The Finance Gem}

^{Today’s Finance Gems:}

1. Accounting and Finance Are NOT the Same

2. Accounting vs. Finance KPIs

3. Accounting vs. Finance: Controlling vs. FP&A

1. Accounting and Finance Are NOT the Same

Most leaders confuse accounting and finance.

They think they’re the same. They’re not.

Accounting reports the past. Finance drives the future.

→ The core difference?
Accounting ensures compliance and accuracy. Finance focuses on strategy and value creation.

One looks backward. The other looks ahead.

Confuse them, and you’ll end up with misaligned priorities, poor decisions, and missed opportunities for growth.

→Accounting: Reporting the Past
Accounting builds the foundation. It ensures financial accuracy. It keeps the business compliant.

It follows strict rules like GAAP or IFRS. It smooths results by matching revenues and expenses. It takes a conservative approach to avoid overstating financial health.

A standardized view of past performance builds trust. But it doesn’t drive future success.

If your accounting function isn’t giving you clarity and reliability, you have a problem.

→Finance: Driving the Future
Finance is where strategy happens. It turns financial data into decisions.

It prioritizes cash flow to ensure liquidity and profitability. It determines how to allocate resources for the highest return. It positions the business to navigate risks and opportunities.

Finance doesn’t just track numbers. It moves the business forward.

If your finance team isn’t aligned with your long-term goals, you’re flying blind.

→Bridging the Gap
Accounting tells you where you’ve been. Finance determines where you’re going.

Great businesses don’t just report history. They shape the future.

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2. Accounting vs. Finance KPIs

Finance and accounting KPIs serve different purposes, yet both are essential for measuring business performance.

Finance KPIs focus on the financial performance of a company and help assess value creation by measuring financial health, ability to generate profits and ability to manage capital appropriately

Key Finance KPIs

 Profitability Metrics
▢ Economic Value Added (EVA) → Measures corporate performance beyond earnings, factoring in the cost of capital.
▢ Earnings Per Share (EPS) → Calculates profitability per outstanding share.
▢ Return on Equity (ROE) → Evaluates how efficiently profits are generated from shareholders’ equity.
▢ Return on Assets (ROA) → Gauges asset efficiency to generate profits.

 Valuation Metrics
▢ Price to Earnings Ratio (P/E Ratio) → Assesses stock valuation relative to earnings.
▢ Dividend Payout Ratio → Shows the percentage of net income returned to shareholders as dividends.

 Liquidity Metrics
▢ Quick Ratio (Acid-Test Ratio) → Measures a company’s ability to meet short-term liabilities using liquid assets.
▢ Current Ratio → Evaluates how well short-term liabilities are covered by short-term assets.

Capital Efficiency Metrics
▢ Return on Invested Capital (ROIC) → Indicates how effectively capital is used to generate profits.
▢ Free Cash Flow (FCF) → Shows cash available after covering operational costs, debt obligations, and reinvestments.

✓Value Creation Metrics
▢ Weighted Average Cost of Capital (WACC) → The return rate needed to satisfy all investors.
▢ Debt to Equity Ratio → Measures financial leverage, calculated as total debt divided by total equity.

Accounting KPIs: Monitoring Financial Operations & Efficiency

Accounting KPIs focus on the day-to-day operations of a company to help measure and monitor financial operation efficiency, and the effectiveness of assets, liabilities, and cash flow management

Key Accounting KPIs

Liquidity Metrics
▢ Operating Cash Flow Ratio → Measures a company's ability to cover short-term liabilities using operational cash flow.

Efficiency Metrics
▢ Inventory Turnover → Tracks how often inventory is sold and replaced.
▢ Accounts Receivable Turnover → Evaluates how efficiently a company collects payments.
▢ Accounts Payable Turnover → Measures how quickly suppliers are paid.

Liquidity - the Cash Conversion Cyle - Metrics
▢ Days Sales Outstanding (DSO) → Shows the average time to collect customer payments.
▢ Days Payable Outstanding (DPO) → Indicates the average time taken to pay suppliers.
▢ Days Inventory Outstanding (DIO) → Measures the average time inventory is held before sale.

Profitability Metrics
▢ Gross Profit Margin → Percentage of revenue remaining after covering direct costs.
▢ Net Profit Margin → Shows the percentage of revenue that translates into net profit.
▢ Break-Even Point → Identifies the revenue level required to cover all costs.

 Asset Efficiency Metrics
▢ Total Asset Turnover → Evaluates how efficiently assets generate sales.
▢ Cash Conversion Cycle (CCC) → Highlights the time needed to turn assets into cash.

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3. Accounting vs. Finance: Controlling vs. FP&A

Controlling and FP&A are two essential financial functions in FP&A ——and while they work together, they have distinct roles that impact decision-making and strategy.

• Both report to the CFO

• Both ensure financial stability

• Both play a critical role in decision-making

• But they operate differently

▷ Controlling is responsible for the integrity and accuracy of your organization’s financial information.

Key Responsibilities:
↴ Maintaining the general ledger
↴ Managing accounts payable & receivable
↴ Overseeing tax compliance
↴ Preparing financial statements
↴ Implementing internal controls & risk management
↴ Coordinating with external auditors

 Why It Matters:
→ Ensures accurate & reliable financial reporting
→ Maintains regulatory compliance

▷ FP&A is responsible for Driving Strategic Growth

FP&A is primarily focused on the future financial health of your organization.

▶ Key Responsibilities:
↴ Budgeting & forecasting
↴ Strategic financial planning
↴ Business case analysis
↴ Financial insights for business units
↴ Data analytics & financial modeling

 Why It Matters:
→ Supports long-term business growth
→ Aligns finance with strategy for profitability & expansion

How They Work Together

Controlling ensures accuracy & compliance, providing reliable financial reports.
FP&A delivers forward-looking insights, using financial data to guide strategy.Together, they give the CFO a complet financial picture.

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As always, if you have specific suggestions or feedback, simply reply to this email.

Thanks so much for reading.

Oana

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