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Economics and Finance – what is the difference or why finance is not money

Economics and Finance – what is the difference or why finance is not money

You often hear about financial and economic activity, its indicators, or something else related to it.

What each of these concepts individually carries, both economics and finance - what is their fundamental difference and connection.

Let's draw certain parallels on a simple example.

There is a man. He is able to perform any physical actions - squat, jump, run, etc. All this activity is provided by the work of his internal organs and the circulatory system.

That is, a person can fully function when the state of his internal system is in a satisfactory condition.

If you project all this onto a business, then a person (a commercial organization) with his physical abilities to carry out any actions is economics, and the internal circulatory system serving his body is finance.

The essence of the commercial approach in any environment where the goal is profit, in itself generates an inextricable link between these two elements - economics and finance.

Economics is the process of economic activity associated with the organization of production, the production of products/services (cost management), its sale, which is carried out at the expense of finance.

When a person does sports, more oxygen enters the blood (finances), blood circulation improves and the person (economy) grows and becomes healthier.

But there may be a situation when a person seems to carry out some actions, but blood circulation (finances) do not ensure his growth and recovery. For example, smokes, drinks alcohol, etc.

This suggests that finance does not always bring a positive effect to the economy and vice versa.

One often hears - What is the economics of your business!?, always meaning by this profit.

Yes, profit is an economic indicator, but in finance it is reflected not in the form of a pure cache (money), as many people used to understand. and in the increase in the value of the total capital of the company.

For example, the company sold its products profitably and made a profit, but the payment for the products was made by barter or offsetting. That is, there is profit, but no money was received, but the total cost of its capital increased (balance sheet).

In this case, the economy is working well, but finance simply does not provide it with a liquid part of assets, i.e. money.

When there is profit, but there is no money, this is a fairly common situation.

There are situations when there is no profit, but there is money (for example, in conditions of falling production volumes and growth turnover of current assets).

Judging by profit about finances, meaning money, is not correct.

It is more correct to ask whether finances work well with profitable activities of the organization.

Or - How finance works in the context of the growing capitalization of the organization/company (its book value).

Finance is a relationship that always takes place in the activities of an enterprise/organization (economy), assuming cash flow, providing the remains of its material and commodity stocks, current account, accounts payable and receivables.

Just as the economy cannot work without finance (monetary relations), so finance cannot work without economics.

From the point of view of accounting - finance is the liabilities on the basis of which assets are formed, at the expense of which, in turn, the economy is built organizations/companies.

Economics and Finance – what is the difference or why finance is not money – Somehow!

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