Comparison with Financial Accounting:
Just as Production and Sales are major functions in an enterprise, Finance too is an independent specialized function and it is well knit with other functions. Financial Management is a separate management area. In many organizations Accounting and Finance functions are clubbed and the Finance function is often considered as part of the functions of the Accountant.
But the Financial Management is something more than an art of Accounting and Book keeping in the sense that, Accounting function discharges the function of systematic recording of transactions relating to the firm’s transactions in books of account and summarizing the same for presenting in financial statements viz., Profit and loss account and Balance sheet, Funds flow and Cash flow statements.
The Finance Manager will make use of the accounting information in analysis and review of the firm’s business position in decision-making. In addition to the analysis of financial information available from the books of account and records of the firm, a Finance Manager uses the other methods and techniques like capital budgeting techniques, statistical and mathematical models and computer applications in decision-making to maximize the value of the firm’s wealth and value of the owners’ wealth.
In view of the above, Finance function is a distinct and separate function rather than simply an extension of Accounting function. Financial Management is the key function, many firms prefer to centralize the function to keep constant control on the finances of the firm. Any inefficiency in Financial Management will be concluded with a disastrous situation.
But, as far as, the routine matters are concerned, the Finance function could be decentralized with adoption of Responsibility accounting concept. It is advantageous to decentralize Accounting function to speedup the process of information. But since the accounting information is used in taking financial decisions, proper controls should be exercised on Accounting function in processing of accurate and reliable information to the needs of the firm. The centralization or decentralization of Accounting and Finance functions mainly depend on the attitude of the top level management.
Comparison with Economics:
The Finance Manager must be familiar with the micro and macroeconomic environment aspects of business.
Microeconomics deal with the economic decisions of individuals and firms. It focus on the optimal operating strategies based on the economic data of individuals and firms. The concepts of microeconomics helps the Finance Manager in decisions like price fixation, determination of capacity and operating levels, break-even analysis, volume-cost-profit analysis, capital structure decisions, dividend distribution decisions, profitable product-mix decisions, fixation of levels of inventory, setting the optimum cash balance, pricing of warrants and options, interest rate structure, present value of cash flows etc.
Macroeconomics looks at the economy as a whole, in which a particular business concern is operating. Macroeconomics provide insight into policies by which economic activity is controlled. The success of the business firm is influenced by the overall performance of the economy and is dependant upon the money and capital markets, since the investible funds are to be procured from the financial markets.
A firm is operating with in the institutional framework, which operates on the macroeconomic theories. The government’s fiscal and monetary policy will influence the strategic financial planning of the enterprise.
The Finance Manager should also look into the other macroeconomic factors like:
i. Rate of inflation,
ii. Real interest rates,
iii Level of economic activity,
iv. Trade cycles,
v. Market competition both from new entrants and substitutes,
vi. International business conditions,
vii. Foreign exchange rates,
viii. Bargaining power of buyers,
ix. Unionization of labour,
x. Domestic savings rate,
xi. Depth of financial markets,
xii. Availability of funds in capital markets,
xiii. Growth rate of economy,
xiv. Government’s foreign policy,
xv. Financial intermediation and banking system etc.
Science or Art:
The Financial Management is neither a pure Science nor an Art. It deals with various methods and techniques which can be adopted, depending on the situation of business and the purpose of the decision. As a Science it uses various statistical and mathematical models and computer applications for solving the financial problems relating to the firm, for example, capital investment appraisal, capital allocation and rationing, optimizing capital structure mix, portfolio management etc.
Along with the above, a Finance Manager is required to apply his analytical skills in decision-making. Hence, Financial Management is both a Science as well as an Art.