July 23, 2024

Understanding The Relationship Between Managerial Accounting And Finance

Finance is a broad term encompassing all those things concerning the science, invention, and management of funds and securities. It is used to describe the science of accumulated funds, their management, allocation, and disposition. All the three branches of finance are closely interrelated, which means that there is no “finance” separate from any one of the three. Finance basically deals with the methods by which money is made to be spent.

The broad term “finance” itself was originated in the 12th century as a Germanic word meaning wealth or gain. Later, French and English borrowed it and made it into their languages where it came to mean the art or science of gaining wealth. Later still, the Latin word fructus became the source of the modern day expression “finance”. Today, finance is involved in all aspects of banking, including business banking, investment banking, commodity and bond markets, insurance, and the money markets.

In business banking, as well as other types of commercial banking, finance is involved in the preparation and transfer of cash needed for day-to-day operations. In other words, it deals with the actual purchase, sale, and lending of financial assets and securities. It also involves the collection and processing of debt payments. For example, if you are a business owner who needs some extra cash, you can opt for your own finance department to help you in this process. If you have some bond debt to be settled, finance department will help you in collecting them.

On the other hand, managerial accounting concerns itself with the interpretation, management, preparation, and reporting of financial data used for making effective financial decisions. Unlike finance, managerial accounting does not deal with cash. Instead, it focuses more on using information to make economic decisions. Some of the key takeaways of managerial accounting are the identification of asset worth, asset allocation, elimination of risk, and the determination of the timing of financial goals. In other words, managerial accounting helps in allocating resources to meet the different economic objectives.

At the root of all three disciplines, economics takes care of theocation of resources. This pertains to the allocation of economic units or sectors for the purpose of achieving the desired results of economic growth. The question here is how these decisions are made? And where does finance come into play? Economics then becomes the lens through which all three disciplines view investment strategies, corporate finance, and the optimal performance of companies as a whole.

Many think that the main objective of finance is to provide means for investors to make money. However, notwithstanding the fact that it is dealing primarily with the flow of monetary funds, it is an integral part of all economic activities. Finance is actually a subset of Economics, just as consumer protection is to consumer spending. Therefore, just as finance enables businesses to create jobs, it also allows investors to make money. The three disciplines of economics, business administration, and managerial accounting combine to form the comprehensive study of business finances.

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