Financial Management
Both economics and accounting are important to the field of finance. There is a degree of interrelation between the three, and the skills and knowledge of each can provide valuable insight into the other. Economics is the study of economic choices and their effects (Simpson, 2011). When performing financial tasks, an understanding of basic economic terms and concepts can improve the output of financial analysis. A simple example would be in performing capital budgeting, such as a net present value analysis. Making revenue projections is easier when one can translate assessments of future economic projections into demand conditions. Looking at data from the Congressional Budget Office, for example, can help financial managers to make demand estimates for a project, and those estimates will be improved if the economic forecasts are clearly understood.
Economics is also valuable because some of the basic concepts relate to financial decision making. In microeconomics, a lot of study in done on choices, and economic decision-making. Concepts like price elasticity of demand contribute directly to the work that financial managers do. In addition, financial managers benefit from understanding the ramifications of their own choices -- for example the tradeoffs inherent in things like capital structure decisions. The concepts that are used when learning and applying these financial management concepts derive directly from the field of economics, so a solid grounding in economic concepts and principles will help the financial manager to make better decisions based on a more sophisticated understanding of these principles.
Accounting is also important to the field of finance. Many financial decisions at the firm level relate directly to accounting concepts. For example, capital structure decisions are based directly on balance sheet information concerning the liabilities and equity of the company. This balance sheet information is used in things like the weighted average cost of capital as well. Another example would be with the net present value calculation, where cash flows are critical. This is based loosely on the cash flow statement, which is directly from accounting.
The ratios that derive from the financial accounting statements are used frequently in finance to determine the health of a company (Russo, n.d). When a lender wants to know what interest rate to charge a borrower, it looks at the liquidity and solvency ratios of the company to determine the likelihood of default, and assigns the interest rate based on that analysis. This is just another example of how the information that accountants compile and audit is used in financial management.
The same can be said for the investments side of finance. For example, when one wants to invest in a company, or in derivatives relating to that company, accounting information is critical. Usually this is financial accounting information, but if managerial accounting data can be found then that is also sometimes used. Formulas such as Black-Scholes are used to value derivate holdings of companies for the production of financial accounting statements, further highlighting the link between finance and accounting in the field.
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