This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
Poor financing is apt to be combined with poor accounting; and in that case the unfortunate owner cannot enjoy even the empty satisfaction of a post-mortem diagnosis.
This brings up a question on which there has been much confusion of thought - the question as to the dividing line between the subject of financing and the subject of accounting. It is not purely an academic question, for in many business concerns the head of the accounting department and the head of the financial department are continually treading on each other's toes. Or, a still worse thing happens; the two offices are combined under the management of one person.
There is undoubtedly a twilight zone between the two subjects. When we come to discuss rates of depreciation, sinking fund requirements, valuation of good-will, and the like, we shall be in constant danger of trespassing into accounting territory; while, on the other hand, our friends the accountants, especially public accountants, have not hesitated to make many bold forays into financial fields. Frequently they are called upon to advise their clients as to securing bank loans, the proper types of bonds and shares to issue, the proper investment of capital funds, the declaration of dividends, and so on. However, bankers, treasurers of corporations, and finance committees are becoming more and more successful in repelling these incursions, thus restricting the accountant to his proper activities.
We need not enter into the technicalities of the friendly controversy. A broad distinction, however, between the two fields of work and study may easily be made. Accounting, properly speaking, deals with recording and analyzing results that have been achieved; and its growing value and popularity is due to the general recognition that the conclusions drawn by skilled accountants may profitably be used as a foundation for future action.
Financing, on the other hand, deals not with recording and analyzing but with getting positive results; how to raise money for various business enterprises; what securities to issue; to whom they should be sold; and how to use the proceeds to the best advantage for the promotion of the business. These are some of the typical problems clearly outside the scope of accounting which are discussed in this volume.
Two sister subjects in the field of finance are investing and banking. Investing deals with the process of supplying capital to business and public undertakings for their permanent use, that is, as original investments or for long-term loans. Banking deals with the process of supplying capital to these enterprises for their temporary use, that is, for short-term loans exclusively. Both of these processes are referred to frequently but they are of so much importance that they will be treated separately. (See Chapters V, VI.) It may be noted that both investing and banking deal with supplying credit, while financing deals with obtaining and using credit. The same problem is involved in both but is treated from different points of view.