Category: Financial Q&A

  • Q. Explain fully the concept of finance.

    Question: Explain fully the concept of finance. 

    Q. What is Finance? Meaning

    Before we begin, first let’s understand the origin of word “FINANCE.” If we trace the origin of finance, there is evidence to prove that it is as old as human life on earth. The word finance was originally a French word. In the 18th century, it was adopted by English speaking communities to mean “the management of money.” Since then, it has found a permanent place in the English dictionary. Today, finance is not merely a word else has emerged into an academic discipline of greater significance. Finance is now organized as a branch of Economics.

    Furthermore, the one word which can easily replace finance is “EXCHANGE.” Finance is nothing but an exchange of available resources. Finance is not restricted only to the exchange and/or management of money. A barter trading system is also a type of finance. Thus, we can say, Finance is an art of managing various available resources like money, assets, investments, securities, etc.

    At present, we cannot imagine a world without Finance. In other words, Finance is the soul of our economic activities. To perform any economic activity, we need certain resources, which are to be pooled in terms of money (i.e. in the form of currency notes, other valuables, etc.). Finance is a prerequisite for obtaining physical resources, which are needed to perform productive activities and carrying business operations such as sales, pay compensations, reserve for contingencies (unascertained liabilities) and so on.

    Hence, Finance has now become an organic function and inseparable part of our day-to-day lives. Today, it has become a word which we often encounter on our daily basis.

    Q. What is Definition of Finance?

    Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect definition of Finance following selected statements will help you deduce its broad meaning.

    1. In General sense, “Finance is the management of money and other valuables, which can be easily converted into cash.”

    2. According to Experts, “Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals, and others on the terms that are most favorable to achieve their economic objectives.”

    3. According to Entrepreneurs, “Finance is concerned with cash. It is so, since, every business transaction involves cash directly or indirectly.”

    4. According to Academicians, “Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business.”

  • Explain the importance of Financial Management!

    Question: Explain the importance of Financial Management in the present day Business World. 

    Answers: The importance/significance of financial management can be discussed/ explained from the following angles:  

    I – Importance to all types of organizations:
    1. Business organizations – Financial management is important to all types of the business organization i.e. Small size, medium size or a large size organization. As the size grows, financial decisions become more and more complex as the amount involves also is large.
    2. Charitable organization / nonprofit organization / Trust – In all those organizations, finance is a crucial aspect to be managed. A finance manager has to concentrate more on the collection of donations/ revenues etc and has to ensure that every rupee spent is justified and is towards achieving Goals of an organization. 
    3. Government / Govt. or public sector undertaking – In central/ state Govt, finance is a key/ important portfolio generally given to most capable or competent person. Preparation of budget, monitoring capital /revenue receipt and expenditure are key functions to be performed by the person in charge of finance. Similarly, in a Govt or public sector organization, financial controller or Chief finance officer has to play a key role in performing/ taking all three financial decisions i.e. raising of funds, investment of funds and distributing. 
    4. Other organizations- In all other organizations or even in a family finance is a key area to be looked in to seriously by a competent person so that things do not go out of gear.      
    II – Importance to all stakeholders:

    Financial Management is important to all stakeholders as explained below: 

    1. Shareholders – Shareholders are interested in getting optimum devidend and maximizing their wealth which is the basic objective of financial management.
    2. Investors/creditors – these stakeholders are interested in the safety of their funds, timely repayment of the principal amount as well as interest on the same. All these aspects are to be ensured by the person managing funds/ finance.
    3. Employees – They are interested in getting the timely payment of their salary/ wages, bonus, incentives and their retirement benefits which are possible only if funds are managed properly and organization is working in profit. 
    4. Customers – They are interested in quality products at reasonable rates which are possible only through efficient management of organization including management of funds. 
    5. Public – Public at large is interested in general public welfare activities under the corporate social responsibility and this aspect is possible only when organization earns the adequate profit. 
    6. Government – Govt is interested in timely payment of taxes and other revenues from the business world where again efficient finance manager has a definite role to play. 
    7. Management – Management is interested in overall image building, increase the market share, optimizing shareholders wealth and profit and all these aspects greatly depends upon the efficient management of financial resources.
    III – Importance of financial management to all deportments of a organization. 

    A large size company has many departments like (besides finance dept.)

    • Production/ Manufacturing Dept.
    • Marketing Dept.
    • Personnel Dept.
    • Material/ Inventory Dept.

    All these departments look for availability of adequate funds so that they could manage their individual responsibilities in an efficient manner. A lot of funds are required in production/manufacturing dept for ongoing / completing the production process as well as maintaining adequate stock to make available goods for the marketing dept for sale. Hence, finance department through efficient management of funds has to ensure that adequate funds are made available to all department and these departments at no stage starve for want of funds. Hence, efficient financial management is of utmost importance to all another department of the organization.