Accounting and financial planning are two of the most important functions of an organization: the axis of corporate finance. They are a marriage that must work hand in hand to fulfill its mission, especially since financial planning is nourished by accounting. What makes them different is their purpose, their temporality and their regulations.
Accounting: Looking back
Its focus is mainly retrospective: it focuses on registering, classifying, summarizing and reporting financial transactions that have already occurred. Its horizon is historical, based on past data to generate periodic reports —monthly, quarterly, annually—.
- Provide a true picture of the current financial situation and past performance.
- Comply with legal and tax obligations: taxes, regulations.
- Generate financial reports — balance sheet, income statement, cash flow — for internal and external users.
- Provide information for operational and control decision making.
In other words, accounting is objective, based on historical facts, and follows an explicit rigorous technique in accounting standards such as IFRS or US GAAP. This regulation seeks uniformity, comparability and transparency of accounting data.
Financial Planning: Looking Forward
Its focus is mainly prospective: it focuses on predicting and determining the future financial course of action to achieve the organization’s objectives, although it maintains a foothold in the past by monitoring closure reports. Its horizon is future, and involves projections in the short, medium and long term.
- Quantify the company’s goals and objectives in financial terms.
- Track forecasts and historical results.
- Accompany the people or areas that execute the plans and actions.
- Forecast income, costs, expenses, capital investments, cash flows and future financing needs.
- Evaluate different financial scenarios and their impact on profitability.
- Support investment, financing and asset management decisions.
- Be a strategic ally of the functional areas in the monitoring of their financial objectives.
The key difference: time
The accounting looks back to report what has already happened. Financial planning looks forward to plan what will happen. Accounting systematically records the events that occurred in a given period; Financial planning projects the future. Both are necessary, but they play different roles.
Clarus Tip: Accounting tells you where your company has been. Financial planning helps you decide where you are going. Neither replaces the other: they need each other.
At Clarus Consultores we connect the accounting information of your company with a prospective and actionable financial planning. Let’s talk about how to integrate both disciplines into their management.