Finance for Entrepreneurs: Difference between Finance and Accounting

One of the big reasons why most entrepreneurs don’t learn finance is because they mistake finance for accounting. In fact most non-finance professionals (as they like to call themselves) use the words interchangeably; just as numerous other pairs of words are used interchangeably: invention and innovation; market and industry and so on…

Accounting and Finance are different terms with their own individual meanings. For a beginner it is good to understand ‘accounting’ as the language of finance. An analogy can be ‘Sanskrit’ is the language of the Vedas (repository of ancient Indian Knowledge). If one wants to master the Vedas, one needs to know ‘Sanskrit’ – but how much and why, makes a whale of a difference.

For example a person who wants to be able to understand the meaning of the ‘Bhagavad Gita’ (The philosophical masterpiece found in the Mahabarata) and apply it to daily life, one need not learn how to write Sanskrit and learn the tough grammar rules that come along with it. All one needs to do is read a translation of the text (word to word), read up the commentary, and take help / clarifications from a scholar when it gets tough. In a similar manner when an entrepreneur starts looking up finance, it is good to learn the lexicon of the finance world by understanding the various terms used in the statements that you use regularly. It is good to understand what the important statements are and how they are used.

Finance, is similar to learning the ‘Bhagavad Gita’. The knowledge and philosophy of the ‘Bhagavad Gita’ can help in daily life and in better decision making. But for this one need not learn Sanskrit, deconstruct the terse grammar constructions, translate, interpret and then learn. Scholars of Vedanta do that for us. We use them to gain access to the meaning in the scriptures and apply the understanding in our lives. Accountants do that equivalent work for us in the field of finance. They do the work of constructing and deciphering the financial constructs for us. Entrepreneurs need to understand the meaning and import of the constructs in finance. Interpreting and applying the meaning in decision making is what is important for entrepreneurs to learn.

An example is – what is an income statement? What does it contain? How is it structured? What can I look up in that? For what information should I look up this statement? What are the terms that usually come up in that? What do they mean? Learning this helps in making sense of the performance of an organization. This will help an entrepreneur in fine-tuning the enterprise for better performance. NOTE: We will learn about it in the future lessons. If you don’t understand how, don’t worry!

So, accounting is the language (including lexicon and grammar) of the world of numbers in business. It provides some standardization when trying to understand a company. It also helps in taking some quantitative help in making decisions. Finance is the aspect of reading, interpreting and applying the meaning of the accounting statements in business. If an entrepreneur learns how to read what the accountants write, it should make them run healthier enterprises.

Business exists to create a customer; a customer exists because an enterprise creates and disburses value to them; and this whole equation sustains itself only if there is a surplus in this relationship. What better way to measure it than numbers? Then, how can we avoid accounting and finance in business.

Hope the following are achieved:

  • Understanding the difference between the two terms ‘accounting’ and ‘finance’; and
  • Remove the fear that we will have to learn a lot of accounting to make sense of finance

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