As an entrepreneur, you don’t need to be told that you’ve got plenty of paperwork that you absolutely must complete.
And if you’re new to the terrain, you’re likely dealing with a whole new technical vocabulary - not exactly thrilling stuff.
You’ve probably heard that your accounting should be absolutely shipshape. That you ought to optimize how you handle your taxes. That you have to keep a close eye on your company’s finance management.
You’re very much aware that all these elements are crucial to the survival of your business. But sometimes it’s hard to see past all the jargon.
After all, aren’t accounting, taxation, and finance management kind of the same thing?
Well actually, no. Not exactly.
There are some notable differences between each of these concepts that, once you understand them, help you make better decisions for the success of your business.
This article breaks down each of these notions so you can (finally) shake the mystery of money admin.
Accounting vs. taxation: what does it mean, exactly?
We often confuse the concepts of accounting and with those of taxation. Yet, each covers a specific domain.
A word on accounting
Accounting is, simply put, a study of the ebbs and flows of money inside a business.
Let’s say, for example, you’re the owner of a small construction business. As is typical in your line of work, you’ll have made investments in equipment or materials, like cement, tools, or a truck. You’ll have also paid your taxes and your social charges.
All these outgoing funds will have to be recorded in your accounting.
At the same time, imagine you’ve also invoiced for some jobs you landed.
Similarly, these incoming funds will have to be recorded in your ledger.
Depending on your taxation regime there are certain specific rules you have to follow to organize this information. For example, micro-enterprises benefit from a simplified accounting system.
Most of the time you should:
- keep a journal;
- keep a general ledger;
- establish an annual report (more specifically by creating a profit and loss sheet, a balance account and accounting appendices)
While you might think that these guidelines serve no practical purpose, on the contrary: they actually help you organize all your financial information so you can benefit from greater visibility over the general health of your business. These documents also make it easy for you to share your accounting with the relevant financial authorities in the event of an audit.
Don’t worry, though: you don’t need to be a finance expert to ace your accounting. If crunching numbers and doing admin doesn’t make your heart sing, you can always hire out a CPA.
What is taxation?
Taxation refers to the legislation that dictates tax collection procedures. (As you can already see, this has nothing to do with accounting.)
Businesses are subject to a variety of taxes, depending on their taxation scheme and legal status.
Among these taxes, you’ll find:
- The Profit Tax
As its name might suggest, this tax concerns your profits. You may be taxed on your company’s revenue (IR) or you may pay a corporate tax (IS). In some cases, you might even be able to choose the more favorable option of the two.
- The Value Added Tax (VAT)
The Value Added Tax applies to all consumer spending. Unless you are exempt, you have to add this into your pricing (the standard rate is 20%). Essentially what you’re doing when you include this in your bill is collecting it on the State’s behalf.
- The Business Property Tax (CFE)
All businesses, including micro-enterprises, are subject to the The Business Property Tax. This tax is based on the value of the goods and property associated with the running of said business (e.g. a storage unit, a studio).
🔔 Important: don’t mistake tax charges with social charges, which feed into social safety nets like health insurance, family allowances, basic and supplemental retirement and parental leave.
How does finance management fit into all this ?
Finance management, the link between accounting and taxation
Finance management is a rather loose concept. One way to describe it would be that it refers to the general management of a company’s finances.
Essentially, it’s business treasury management. It’s establishing budget strategy, promptly handling bills, addressing outstanding invoices, managing stocks, negotiating payment schedules, etc.
Based off this definition, finance management includes taxation, but also encompasses accounting (re: monitoring the ebb and flow of money).
Accounting allows you have complete transparency in your finances, and therefore it optimizes your finance management.
Taxes are an unavoidable expense when running your business. However if you’re savvy, you can leverage the taxation system to save more money to reinvest however you need - whether it’s through investment strategy, choosing a favorable tax scheme, or seeking funding to benefit from tax breaks.
🗒️ Some key takeaways
- Accounting and taxation are very different from one another.
- Accounting records the flow of money in a company, whether it’s revenue (money entering) or costs (money leaving)
- Taxation refers to the legislative procedure that handles collecting taxes (esp. Revenue Tax, VAT and CFE)
- Both accounting and taxation fall under the umbrella of finance management.
- Overall, finance management is handling your company’s resources effectively. Accounting serves you by giving you better visibility over the flow of money and allowing you to better analyze your finances. Taxation should be taken into account when setting a budget, but it can be applied in a way that supports the growth of your business.