Concept of Finance | Finance definition
Concept of Finance
Finance deals with fund management. Finance prepares plans and implements necessary activities about what amount of funds should be collected from which sources and where & how this fund is to be invested for the highest profit in the project. In the case of a business firm, fund flows in the business from the selling of products. Different types of funds are needed to produce and buy goods for the business, like- purchasing machinery, purchasing raw materials, paying wages to the laborers, etc. These are the utilization of funds. Funds need to be collected in a planned way as per the requirement of funds to maintain an uninterrupted production process. Finance means this process is related to fund collection and utilization.
If you visit a tailoring shop in your locality, you will see there one or two people sewing with a machine. Again, someone may be cutting clothes or stitching the buttons. So to continue the tailoring business properly, the shop owner has to purchase machines, threads, buttons, scissors, etc. of the necessary amount. At the beginning of his business, he bears these expenses from his own saving. If the fund appears insufficient, then he may take a loan from his relatives to overcome the shortage. When the business is in operation, at the end of every month he needs to bear expenses for the payment of workers’ wages, house rent, electricity bill, etc. and he pays all these with the money earned by sewing clothes. He also has to plan to pay back the loan money from this monthly collection. An owner of a tailoring shop always expects that he can earn some amount of profit even after meeting all necessary expenditures from the income of the business, by which he can save for the future or can utilize for business expansion even after meeting the regular expenses of his family. So if an owner of a tailoring shop conducts business through proper planning regarding the source of finance and its utilization, only then he can earn profit through the smooth operation of the business.
Otherwise, it will be found that due to cash crises sewing thread cannot be bought timely and the customers are returning. Again, it may be needed to shut down the business due to a lack of money to buy a new machine to replace the old one. To conduct the business properly, Business finance deals with when and for what reason how much amount of fund is needed, and from which sources this fund should be collected for smooth operation of the business.
There have implications for finance in the family too. Generally, every family has one or more than one source of finance. Income may be obtained from different sources in different families, such as, from service, business, agricultural activities, self-employment, etc.
Besides these, regular expenditure of a family occurs for daily shopping costs, house rent, school fees, different bills payment, etc. As expenditure should be matched with income, in this way, the right time of expenditure should also be maintained. If money is insufficient as per demand, then as an example, it may happen that name of the student may be cut down from the register. In the case of a family, pre-planned identification of the sources of finance and its utilization is the financial process. Other than daily expenditure of this type, sometimes occasional expenditure may be required in the family which may exceed the income ability of a person. If it is not possible to collect money from regular income sources for such expenditures as buying a new television or refrigerator, then the shortage may be fulfilled through a long-term loan. In that case, a loan repayment plan needs to be prepared. As a result, the concept of finance helps to determine the sources of funds and make proper management of it to conduct the family smoothly.
The financial process can be understood from the perspective of a school also. School is a social organization whose main objective is not profit earning, there also has a plan of income- expenditure and fund management. Educational institutions generally collect funds from sources of their student’s tuition fees, examination fees, admission fees, etc. The institution has to meet different expenditures with this fund to run the academic activities properly, like- payment of teacher-staff salary, house rent, electricity bill, different types of renovation expenses, and purchasing computers and furniture. So, ensuring fund management for performing various working processes of the institution nicely by considering different sources of funds and different sectors of utilization is financing from the perspective of the school.
Among the above examples, a tailoring shop is a profit-making organization, but family and school are non-profit organizations. Our present topic is involved mainly in the financing of profit-making- or business organizations. How is the financial process of a grocery shop? The shop owner earns a profit by selling products. But for the purpose of selling, he needs to complete on a regular basis purchasing products, paying rent, electricity bill, wages of the workers, etc. as current expenditures. Moreover, sometimes he has to spend a large amount of money for purposes like- expansion of business for the need of the customers, purchasing a refrigerator, etc. These are his fixed expenditure. Thus a grocer requires to invest both in fixed assets and current assets. If income from selling is not sufficient for collecting funds for investment, he has to collect funds from other sources like personal funds, friends-relatives, purchases on credit, etc. Again, he may collect large amounts of money which he needs to invest in fixed assets usually from commercial banks. In such financing, as there is the opportunity of repaying over a long schedule of time, the risk of loan repayment is reduced a bit. In the case of a grocery shop, the main activities of business finance are fund management through proper utilization of money received from sales proceeds in meeting current expenditures, some long-term investments, collection of money from less risky sources, timely repayment of loan installments, etc.
Square Pharmaceuticals, Bata Company, Kohinoor Chemicals – these are large size business organizations that are called companies. The financial process of such a company is not as simple as a grocery shop or tailoring shop rather it is comparatively complex.
In fund collection, a large company gets more benefits than a small organization. For example, a company collects capital by selling shares in the share market. A company’s goodwill, rate of profit, customer services, or consumer satisfaction helps to increase the share price in the share market. Business finance deals with and provides guidance regarding: from among different sources using which source, when and how much fund should be collected and in which sectors, how much amount and how will it be invested to increase the profit.
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