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What Comes First, Financial Modeling or Accounting?

Welcome to the Next4Growth blog, where we dive deep into the financial intricacies that can make or break startups and SMEs. As Fractional CFO services based in the heart of Austin, Texas, we've guided numerous businesses through their financial journey, helping them navigate the complex waters of growth and sustainability.

Today, we're tackling a question that might seem like a classic "chicken or egg" scenario for many entrepreneurs and business owners: What comes first, financial modeling or accounting?

The Foundation: Understanding Accounting

To set the stage for our discussion, let's first understand what we mean by accounting. Accounting is often regarded as the language of business. It is the systematic recording, reporting, and analysis of financial transactions of a business. 

Think of it as the meticulous documentation of your business’s financial history. This includes everything from daily transactions, such as sales and purchases, to broader financial reports like balance sheets and income statements.

Accounting serves as the foundation upon which businesses can make informed decisions, comply with regulatory laws, and communicate their financial health to stakeholders. 

If you are struggling with accounting, at Next4Growth we offer everything around accounting with comprehensive bookkeeping services in Austin. Learn more here.

The Blueprint: Entering Financial Modeling

Financial modeling, on the other hand, is the process of creating a summary of a company's expenses and earnings in the form of a spreadsheet, which can be used to calculate the impact of a future event or decision. The different types of financial models are tools used for forecasting a business's financial performance based on its historical data, assumptions about the future, and an analysis of its operations and environment.

Financial models simulate the potential outcomes of various strategic decisions, ranging from expansion and investment to mergers and acquisitions. They allow businesses to visualize the potential impact of their choices before committing resources and energy. Now, let’s learn about finance and accounting services. 

So, What Comes First: accounting or building financial models?

The debate about what should come first boils down to understanding the role each process plays in the lifecycle of a business. 

Fractional CFO going over financials

Here’s how we at Next4Growth view it:

Finance and Accounting Services: The Indispensable Bedrock

Without accurate and up-to-date accounting services, any financial model built would rest on shaky ground. The quality of a financial model is heavily dependent on the accuracy of the data fed into it. Since accounting provides a historical record of a company's financial activities, it acts as the primary source of data for financial modeling. In essence, without accounting, financial modeling would be akin to building a castle on sand.

For startups and SMEs, establishing robust accounting practices from the outset is crucial. This not only ensures compliance with legal standards but also offers a clear view of your financial health, which is essential for making informed decisions.

Looking for outsourced finance and accounting services? Book a consultation with our experts here. 

Financial Modeling: The Vision for Growth

Once the accounting groundwork is in place, financial modeling becomes the strategic tool that helps steer the company toward its growth objectives. With solid accounting data, models can accurately project future revenues, cash flows, and scenarios, helping businesses plan investments, budgeting, and risk management more effectively.

In the lifecycle of a business, financial modeling often follows accounting, serving as a forward-looking complement to the backward-looking nature of accounting.

The Verdict: What Comes First, Financial Modeling or Accounting? 

While both accounting services and financial modeling are critical for the success of a business, establishing a strong accounting foundation naturally precedes the development of reliable financial models. In other words, good accounting is the first step toward effective financial planning and analysis.

Outsourcing Accounting For Small Businesses

At Next4Growth, Fractional CFO services, we've seen firsthand how businesses in Austin and beyond flourish when they prioritize setting up and maintaining robust accounting systems with thorough bookkeeping services. This, combined with strategic financial modeling, empowers businesses to navigate growth confidently, make smarter decisions, and achieve their financial goals.

Whether you're just starting or looking to scale your business, remember that a solid financial infrastructure begins with accounting. From there, the sky's the limit on where financial modeling can take you. 

For personalized advice on how to implement effective accounting practices and develop strategic financial models for your business, reach out to us at Next4Growth. Let’s build your financial roadmap to success together.

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