Accounting versus Financial Management (August 2007)

I am constantly amazed at the number of people who can’t or don’t distinguish between accounting and financial management. It’s no surprise, I guess! Even in big companies, the terms “accountingandfinance” are often run together as if they are one word. They are not; and the differences are important.

First, let me say that I think very highly of accountants! My brother is a CPA (Certified Public Accountant) and he’s a great guy. But like most people, he has a certain area of expertise. His is audit, particularly in the financial services industry. When I have an audit or control question, I always call him. But he’s not a tax expert nor does he pretend to be.

Most companies hire a CPA for their tax expertise. They generally do a fine job of the tasks they are asked to perform and may even be capable of doing an excellent job of financial management. But, too often, businesses visit their CPA only at tax time with the goal of completing the necessary forms and calculating their minimum tax burden. Obviously, this needs to be done. But this is very different than financial management of the company!

Financial management is about understanding changes in financial performance from month to month, quarter to quarter, and so on. It also involves the daily decision making about how resources are deployed within an organization (read “resources” as “money”). This involves either decisions to spend money for operating expenses, long term capital investments, or schedule employees! Often, those running a company forget that one of their biggest controllable costs (and therefore their biggest levers to change the expenses of the business) is labor.

As I write this, I am looking at the financial statements for a business for the first seven months of the year. You can tell that they don’t seek professional guidance to help them produce their monthly financial statements. Raw materials costs vary wildly by month because they charge purchases directly to Costs of Goods Sold without taking into account changes in inventory. Labor also varies monthly, and doesn’t appear to be managed tightly to the volume of business that occurs during the month. Nor do they accrue labor expenses appropriately (so a month with five Fridays has higher payroll than a month with four Fridays). Several expense line items have credits in various months, reflecting “negative” expenses thereby distorting the income in the period. Finally, expenses that should be relatively fixed each month vary substantially.

For me, or anyone who knows how to read financial statements, it raises multiple questions . . . the answers to many will likely raise more questions! But that’s precisely how one improves any company’s financial reporting process . . . and finds increased profits in the process.

Do you have solid Financial Management?

If you need help with your business, financial plans, or goal setting, please give me a call at (314) 863-6637 or send an email to And, remember . . . Your Cash Is Flowing. Know Where.

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