Finance is an integrated part of overall management and is not a very independent area. It draws heavily on related disciplines and fields of study, such as economics, accounting, management, and marketing. Although these disciplines are interrelated, there are critical differences among them.
Relationship Between Finance and Economics
Finance and economics involve the allocation and use of resources, decision-making, the study of markets and economic systems, and the use of models and analysis.
Economics is the study of how men and society choose with or without the use of money to employ productive resources that could have alternative uses to produce various commodities and distribute them for consumption now or in the future among multiple people and groups in society.
While finance is specifically concerned with the allocation and use of financial resources, economics is more broadly concerned with the allocation and use of resources.
Relationship Between Finance and Macroeconomics
Macroeconomics is concerned with the overall financial environment in which the firm operates.
Economics is also concerned with financial structure, money and banking system, money and capital market, financial intermediaries, and monetary and fiscal policies.
Financial managers recognize and understand how monetary policy affects the cost and availability of funds.
Financial managers beware of the various institutions and are versed in fiscal policy and its effects on the economy.
The financial manager should understand economic activity and the economic policy for decision-making.
Relationship Between Finance and Microeconomics
Finance is concerned explicitly with the allocation and use of financial resources. Microeconomics is concerned with allocating and using resources at the individual and firm.
Supply and demand relationships and profit maximization strategies. A mix of productive factors relates to optimum sales level and product pricing. Measurement of utility preference and risk determines the value. Rational depreciation will permit the achievement of the assets.
Financial decisions are made based on comparing marginal revenue and marginal cost, which increases the firm’s profit.
So, the field of finance is closely related to economics. Moreover, finance is the applied subject of economics.
Relationship Between Finance and Accounting
Accounting is an information system that identifies records and communicates the economic events of an organization to interested users.
Finance and accounting are closely related fields that both involve the management of financial resources, the use of financial statements, decision-making, financial planning, the analysis of financial data, the management of accounts payable and accounts receivable, the management of cash flow, compliance with laws and regulations, risk management, and communication.
There are three activities in accounting, such as;
- Identify economic events,
- record and provide financial activities, and
- Communicate to interested users.
Finance uses the data collected by accounting.
The purpose of accounting is the collection and presentation of financial data.
The financial manager uses accounting information for financial decision-making. The firm’s finance (treasurer) and accounting (controller) activities are closely related.
Accounting and finance are related to the emphasis on cash flows and the other to decision making.
Accounting is an essential input in financial decisions.
The accounting function is a necessary input into the finance function. Accounting generates information relating to the operations of the firms. The financial manager makes fund statements from income and financial statements.
Financial statement assists financial managers in evaluating past performance and future planning.
Accounting helps financial managers.
The Finance (treasurer) and accounting (controller) activities are typically within the control of the Chief Financial Officer (CFO)/ Vice President (Finance). Small firms’ controller (Accounts Manager) often performs the finance function.
The firm would be financially profitable in an accounting sense.
Relationship Between Finance and Management
Management is a set of activities directed at an organization’s resources to achieve organizational goals efficiently and effectively.
The relationships of finance with management are discussed below:
Financial Planning and Management Decisions
Financial policies will be devised to fit the management decisions of a firm in practice. The finance function of raising and using funds has a significant effect on other functions of management.
Management involves financial planning and analysis. The financial manager is the decision-maker of the firm. Finance uses planning, decision-making, control, and other management tools. Buying new machines or assets on an investment project affects the flow of funds.
Finance helps with day-to-day management operations.
Finance provides the funds that will be used in business. It requires payment of salaries and other benefits involving finance. Identifying the constraints of funds for the manager running the business is necessary.
- Financial advice and guidance: Finance professionals provide financial advice and guidance to management departments to help them make decisions about all business operations.
- Financial data and analysis: Financial data and analysis help management understand the business’s financial performance and make informed decisions about strategy and resource allocation.
- Developing budgets and forecasting financial performance: Finance can help develop budgets and forecast financial performance, which can help management make informed decisions about resource allocation and identify potential risks and opportunities.
Finance helps to maintain the day-to-day management operations by providing financial data and analysis, developing budgets, managing accounts payable and accounts receivable, managing cash flow, and providing financial advice and guidance.
Measuring The Performance of The Management
Finance provides financial data and analysis to support decision-making and resource allocation, while management is responsible for setting goals, making decisions, and allocating resources to achieve those goals.
Both finance and management monitor and measure the performance of an organization. Finance provides financial metrics such as profitability and returns on investment (ROI), and management is responsible for tracking and analyzing other performance indicators such as customer satisfaction and employee engagement.
Finance and management are closely related functions that work together to ensure the success and sustainability of an organization.
The decisions are made based on their financial effects on the firm’s overall value. Finally, the tools and techniques of management help analyze complex financial management problems.
Relationship Between Finance and Marketing
Finance and marketing are two different business areas, but they are closely related and often intersect.
Finance is concerned with managing a company’s financial resources, including the planning, acquiring, and managing financial assets such as cash, investments, and credit. Finance also involves creating and analyzing financial statements, budgeting, and forecasting.
On the other hand, marketing is concerned with promoting and selling products or services. It involves researching, understanding customer needs and preferences, developing marketing campaigns and strategies to reach and engage potential customers, and analyzing and tracking the effectiveness of marketing efforts.
Marketing is a social and managerial process by which individuals and groups obtain what they need and want by creating, offering, and exchanging value products with others.
Finance draws the decisions on supportive marketing methods.
Financial managers consider the impact of product development and cash flows from marketing.
Changes in the marketing process may necessitate capital expenditures, which the financial manager must evaluate and finance. There exists an inseparable relationship between the functions of finance and marketing.
Marketing activities directly or indirectly involve the use of finance.
The finance department provides the necessary funding for marketing campaigns through internal budget allocation or external funding sources. Marketing, advertising, and promotion activities affect financial resources.
Marketing and finance functions are made to maximize the profit and wealth of the firm.
Marketing and finance functions to maximize the profit and wealth of a firm.
When the marketing functions end, the finance functions begin. The financial policies will be devised to fit the firm’s marketing decisions.
Developing effective marketing strategies
Marketing can help identify target customers and develop strategies to reach them effectively, such as through advertising, social media, or content marketing. This can help increase sales and revenue, which can ultimately contribute to the profitability and wealth of the firm.
Managing expenses and maximizing the ROI of marketing strategies
Finance can help manage expenses and ensure that marketing campaigns are cost-effective, maximizing the return on investment (ROI). Carefully tracking and analyzing the results of marketing campaigns, finance identifies the campaigns that are the most effective in driving sales and revenue.
Both marketing and finance can work together to allocate resources effectively, ensuring that the right resources are used effectively to achieve the desired results.
Marketing and finance must collaborate to analyze market trends and identify opportunities for growth and expansion. This can involve identifying new customer segments or entering new markets, which can help increase sales and revenue.
Marketing and finance work together to manage risk, identify potential business threats, and develop contingency plans to address them. This can help protect the profitability and wealth of the firm.
Overall, marketing and finance can work together to maximize the profit and wealth of a firm by developing effective marketing strategies, managing expenses and maximizing ROI, allocating resources effectively, analyzing market trends, and managing risk.