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.