Brian Feroldi

Accounting vs. Finance: What's the difference?

Here’s a quick breakdown

📚 Grab my FREE accounting infographic ebook:
🔗 → https://lnkd.in/exfM9s8R

ROLE TYPES
📚 Accounting: Compliance-focused, detail-oriented, process-driven
📊 Finance: Strategic, forward-looking, decision-making-focused

KNOWLEDGE
📚 Accounting: GAAP, IFRS, tax laws, financial statements, audit procedures
📊 Finance: Capital markets, financial modeling, strategic planning, risk management

SKILLS
📚 Accounting: Financial reporting, auditing, tax compliance, bookkeeping, financial controls
📊 Finance: Financial analysis, investment analysis, forecasting, budgeting, planning

DESIGNATIONS
📚 Accounting: CPA, CMA, CIA, CGMA
📊 Finance: CFA, FRM, CAIA, CPA

CAREER PROGRESSION
📚 Accounting:
Staff Accountant → Senior Accountant → Accounting Manager → Controller → CFO
📊 Finance:
Financial Analyst → Senior Financial Analyst → Finance Manager → CFO

TYPE OF WORK EXPECTED
📚 Accounting: Audit, tax, consulting, forensic accounting, risk management
📊 Finance: Investment banking, private equity, venture capital, corporate strategy, treasury

ALTERNATIVE CAREER PATHS
📚 Accounting: Partner in a firm, transition to consulting or forensic accounting
📊 Finance: Transition to investment banking, private equity, venture capital

Here's an easy way to remember the difference:

Accounting is BACKWARD looking.
Finance is FORWARD looking.

Follow Brian Feroldi for more content like this.

If you found this post useful, please repost ♻️ to share with your audience.

P&L Statement, Visualized

If you're in business, you MUST understand how a Profit & Loss Statement works.

P&L has many different names, including:
→Income Statement
→Revenue Statement
→Earnings Statement
→Operating Statement
→Statement of Earnings
→Statement of Operations

The P&L shows a company's profitability at multiple levels over a period of time using accrual accounting.

Its purpose is to track a company's revenue, expenses, and profits.

Main sections:

💰 REVENUE: Total Sales
➖ COST OF GOODS SOLD: The cost to deliver the product or service
💰 GROSS PROFIT: Revenue - Cost of Goods Sold
➖ R&D EXPENSES: All expenses related to developing products & services
➖ SG&A EXPENSES: All other overhead expenses
💰 OPERATING INCOME: Gross Profit - Operating Expenses
➖ INTEREST EXPENSE: Interest paid to bondholders & banks
💰 PRE-TAX INCOME: Operating Income - Interest Expense
➖ INCOME TAX: Taxes paid to Governments
💰 NET INCOME: Pre-Tax Income - Income Tax

To analyze a P&L quickly, focus on changes in margins.

GROSS MARGIN 📊

Gross margin is a profitability metric that indicates the percentage of revenue after subtracting the cost of goods sold (COGS).

Calculation 🔢
Gross Margin = Gross Profit / Revenue
Gross Profit = Revenue - COGS

OPERATING MARGIN 📊

Operating margin, or operating profit margin, measures the percentage of operating income (profit after operating expenses) relative to total revenue.

Calculation 🔢
Operating Margin = Operating Income / Revenue

NET MARGIN 📊

Net margin, also referred to as net profit margin or simply profit margin, represents the percentage of net income (profit after all expenses, including interest and taxes) relative to total revenue.

Calculation 🔢
Net Margin = Net Income / Revenue

Was this visual helpful? Let me know in the comments section below!

Follow Brian Feroldi for more content like this.

***

P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

Check it out here (It's free) → https://lnkd.in/eKbRV7g6

Balance Sheet Synonyms

Balance Sheets do not have a universal layout.

That's because management teams control the terms and categories they use in their financial statements.

Here's the master list of words that management teams can use when creating their Balance Sheet:

BALANCE SHEET:
→Net Worth Statement
→Financial Status Report
→Statement of Financial Position
→Statement of Financial Condition

CASH:
→Cash on Hand
→Cash Assets
→Liquid Assets
→Cash Reserves
→Marketable Securities

ACCOUNTS RECEIVABLES:
→Receivables
→Bills Receivable
→Debtor Balances
→Trade Receivables
→Outstanding Invoices

INVENTORY:
→Stock
→Goods
→Merchandise
→Product Stock
→Goods

OTHER CURRENT ASSET:
→Deposits
→Notes Receivable
→Prepaid Expenses
→Deferred Tax Assets
→Short-term Investments

LONG TERM INVESTMENTS:
→CDs
→Bonds
→Stocks
→Pension Funds
→Long-term Notes Receivable

GOODWILL:
→Blue Sky Value
→Excess Earnings
→Purchased Goodwill
→Consolidation Surplus
→Business Reputation Value

OTHER LONG-TERM ASSETS
→Intangible Assets
→Deferred Tax Assets
→Right-of-Use Assets
→Long-Term Receivables
→Property, Plant, and Equipment

PAYABLES:
→Supplier Debt
→Outstanding Bills
→Unpaid Expenses
→Accounts Payable
→Accrued Expenses

SHORT-TERM DEBT:
→Notes
→Liquid debt
→Current debt
→Liquid debt
→Liquid debt
→Liquid debt
Immediate debt

OTHER SHORT-TERM LIABILITIES:
→Notes Payable
→Short-term Loans
→Dividends Payable
→Deferred Revenue
→Income Taxes Payable

LONG-TERM DEBT:
→Senior Debt
→Long-term Loans
→Long-term Borrowings
→Convertible notes
→Long-term Bonds Payable

OTHER LONG-TERM LIABILITIES:
→Minority Interest
→Pension Obligations
→Deferred Tax Liabilities
→Long-term Capital Leases
→Long-Term Deferred Revenue

PREFERRED STOCK:
→Preferred Shares
→Preference Shares
→Preferred Equity
→Convertible Preferred Stock
→Senior Equity

COMMON STOCK:
→Common Equity
→Ordinary Shares
→Founders' Shares
→Common Shares
→Additional Paid-In Capital

RETAINED EARNINGS:
→Earned Surplus
→Accumulated Earnings
→Accumulated Profit
→Accumulated Deficit
→Accumulated Operating Losses

TREASURY STOCK:
→Own Shares
→Treasury Shares
→Reacquired Shares
→Shares in Treasury
→Share Repurchase

***

P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

Check it out here (It's free) → https://lnkd.in/eKbRV7g6

If you found this post useful, please repost ♻️ to share with your audience.

Financial Statement Yellow Flags 🇳🇺

Watch for these warning signs:

⚖ BALANCE SHEET
→ Goodwill: More than 50% of assets
→ Receivables: Rising faster than sales
→ Inventory: Rising faster than profits
→ Debt: Becoming excessive
→ Cash: Less than 25% of total debt
→ Retained Earnings: Are negative

💰 INCOME STATEMENT
→ Revenue: Sudden slowdown in growth rate
→ Gross Margin: Declining
→ Extraordinary Charges: Large and frequently appear
→ Tax Rate: Suddenly declines
→ Net Profit: Lower than cash from operations
→ Sales & Marketing Expense: Growing faster than Revenue

🇳🇺 Other:
→ Sudden change in auditor
→ Negative auditor opinion
→ Sudden exit of top management
→ Reduced disclosure
→ Excessive management compensation
→ Excessive dilution

IMPORTANT: I labeled these as “Yellow“ flags for a reason.

Lots of companies have GOOD REASONS to violate these “rules“.

The point is that if you see one of these yellow flags, you should investigate further.

Accounting is filled with nuance.

What Yellow Flags 🇳🇺 did I miss? Let me know below!

***

📌 P.S. Want to go deeper into analyzing financial statements? Join me for a FREE webinar on Thursday, Oct 12th.

Topic: How to analyze unprofitable business.

RSVP here: https://lnkd.in/eMeJWmPS

➕ Follow me Brian Feroldi for more content like this.

If you liked this post, please repost ♻️ to share it with your network.

How to analyze a balance sheet in <2 minutes.

Study these 4 ratios:

⚖ 1: Quick Ratio

❓ Question: Can the company pay its bills?

➗ Equation: Cash + Equivalents + AR / Current Liabilities

🔢 Guide:
Fragile = <1.0
Robust = 1 to 1.5
Antifragile = <0.7

⚖ 2: Current Ratio

❓ Question: How well does the company manage its assets?

➗ Equation: Current Assets / Current Liabilities

🔢 Guide:
Fragile = <0.7
Robust = 1
Antifragile = >2.5

⚖ 3: Debt-to-Equity Ratio

❓ Question: How much leverage is the company using?

➗ Equation: Total Liabilities / Shareholder Equity

🔢 Guide:
Fragile = >2.0
Robust = ~1
Antifragile = <0.7

⚖ 4: Goodwill-to-Assets Ratio

❓ Question: Is the company growing organically?

➗ Equation: Goodwill / Total Assets

🔢 Guide:
Fragile = >50%
Robust = 10% - 50%
Antifragile = <10%

To be clear, this isn't all the balance sheet analysis you should do.

But, looking at these four ratios can get you 90% of the way there in less than 2 minutes.

Which questions do you have? Let me know in the comments section.

***

📌 P.S. Want to go deeper into analyzing financial statements? Join me for a FREE webinar on how to analyze unprofitable business.

RSVP here: https://lnkd.in/eMeJWmPS

➕ Follow me Brian Feroldi for more content like this.

If you found this post useful, please share (repost ♻️) to help make LinkedIn a better platform for all.

10 types of income-producing assets: 💰

1: Stocks/Equities 📈

⁉ WHAT: Stocks represent ownership in a business
💸 RETURN POTENTIAL: 6%-10%
✅ PROS: High historic returns, can produce income, easy to own.
❌ CONS: High volatility, valuations can change quickly

2: Bonds 📜

⁉ WHAT: Loans made from an investor to a borrower
💸 RETURN POTENTIAL: 3%-7%
✅ PROS: Low volatility, easy to own, good for rebalancing.
❌ CONS: Low returns, not great in a low-interest rate environment

3: Savings Accounts/CDs 🏦

⁉ WHAT: Cash held in a bank
💸 RETURN POTENTIAL: 2%-5%
✅ PROS: Safety of principle, less risky than bonds
❌ CONS: Low returns, not great in a low-interest rate environment

4: Real Estate Investment Trusts (REITs) 🏘

⁉ WHAT: A business that owns and manages properties and pays out the income to its owners
💸 RETURN POTENTIAL: 8%-12%
✅ PROS: Easy to buy/sell, high income
❌ CONS: Highly correlated with stocks, volatile

5: Master Limited Partnerships (MLPs) ⛽

⁉ WHAT: A business structure that combines the tax benefits of a partnership with the liquidity of publicly traded securities
💸 RETURN POTENTIAL: 5%-15%
✅ PROS: High yields, tax benefits, inflation hedge
❌ CONS: Complex tax reporting, volatile prices

6: Investment Real Estate 🏠

⁉ WHAT: When managed well, the renter pays off the mortgage while the owner earns long-term appreciation
💸 RETURN POTENTIAL: 5%-20%
✅ PROS: High return potential, can use leverage, a place to stay
❌ CONS: Time intensive, high capital needs, low diversification

7: Farmland 👨‍🌾

⁉ WHAT: An income-producing asset that has been a major source of wealth throughout history
💸 RETURN POTENTIAL: 7%-9%
✅ PROS: Low correlation to other assets, good inflation hedge
❌ CONS: Harder to buy, higher fees

8:. Small Businesses/Franchise 🏗

⁉ WHAT: Owning a part of a small business
💸 RETURN POTENTIAL: 0%-25%
✅ PROS: High return potential
❌ CONS: Risky, huge time commitment

9: Royalties 🗞

⁉ WHAT: Earn income from royalties on music, film, and trademarks
💸 RETURN POTENTIAL: 5%-20%
✅ PROS: Generate steady income, high return potential
❌ CONS: High fees, subject to changing consumer tastes

10:Products you create 💾

⁉ WHAT: Sell physical or digital goods to an audience
💸 RETURN POTENTIAL: 0%-10,000%
✅ PROS: Full ownership, huge return potential
❌ CONS: Hugely labor intensive, no guarantee of success

Which asset type do you like best?

***

P.S. Want to understand how the stock market works (for free)?

Enroll in my 5-day email course: https://lnkd.in/eBUBw8Fb

Each day, I'll email you 1 lesson that demystifies the stock market. I'll explain what the stock market is, how it works, and how to get started investing.

If you found this post useful, please repost ♻️ to share with your audience.