BCom 3rd Year Finance Meaning Role Objectives Kinds Study Material Notes in Hindi

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BCom 3rd Year Finance Meaning Role Objectives Kinds Study Material Notes in Hindi

BCom 3rd Year Finance Meaning Role Objectives Kinds Study Material Notes in Hindi: Traditional Concept of Finance Modern Concept of Finance Definition of Finance Role or Importance of Finance Types of Finance Objectives of Finance All India Financial Institutions State Level Institute Exercise Questions Long Answer Questions  Short Answer Questions Objective Type Questions:

Finance Meaning Role Objectives
Finance Meaning Role Objectives

BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi

FINANCE: MEANING, ROLE,

OBJECTIVES AND KINDS

Finance is the lifeblood of business. It does not matter whether the business is small or big, the finance plays an important role from the beginning to its success. A person may be qualified but he cannot be a successful businessman without proper arrangement of finance. A higher profit can be earned from the business through good financial arrangement. The better financial position can only pave the way for good business. There is also a proverb in English-“Money begets money.”

TRADITIONAL CONCEPT OF FINANCE

The finance not only has relation with business but also with the whole economic system. According to time and situation there has also been a change in the concept of finance. When the finance is used for business then it is called business finance. According to the traditional concept, finance means a proper arrangement of capital for the business. Thus as per traditional concept finance means to see that business has sufficient fund in liquid form to meet the liabilities or not. So the meaning of finance was limited only upto collectioning a sufficient fund.

MODERN CONCEPT OF FINANCE

According to the modern concept, the finance does not have its meaning upto the collection of funds but it has to be marked by such utilisation to earn a higher profit. Thus according to this concept, the collection of fund is also related with such uses which might earn maximum benefit. As per this new concept, the role of financial manager is larger.

In order to understand the meaning of finance, some important definitions has to be studied.

Finance Meaning Role Objectives

DEFINITIONS OF FINANCE

Finance has been defined by various scholars. Some of the important definitions are the following:

(1) According to J.L. Massie, “Finance is that operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.”

(2) According to F.W.Paish, “In modern money using economy finance may be defined as a provision of money at the same time it is wanted.”

(3) According to J.W.Braidle, “Finance is that of business mana devoted to a judicious use of capital and a careful selection of source of ca in order to enable a spending unit to move in the direction of reaching it! teaching its goals.

(4) According to Bearban and Smith, “Finance or financial manage cial management is a technique of determining sources of capital and finding the way for optimum utilisation.”

(5) According to Hestings, “Finance is an art and science of raising and spending money.”

After studying the above definitions it can be said that the finance is the sum total of all activities which is helpful to collect, allocate, use and control the finance.

ROLE OR IMPORTANCE OF FINANCE

Finance is the base of any business. The importance of finance may be understood well on the basis of the following facts :

(1) Necessary to Establish a Business : After taking the decision to establish a business there is a need of many fixed assets like land, building, machine, furniture etc. Finance is necessary to purchase these fixed assets. Apart from this, some preliminary expenses are also incurred at the time of establishment of a business. Thus no business can be established in the absence of finance.

(2) Necessary to Run the Business : After the establishment of a business there is a need of working capital to operate the business. The working capital is that capital which helps in buying the raw materials and the wages, salary, rent etc are paid. So the finance is important to meet the need of working capital

(3) Necessary for the Modernisation and Expansion of Business : This is the era of competition. So it is not sufficient to establish a business. There is a need of expansion of business according to time demand. Apart from this the modernisation of machine and technology should also be taken into account. For all these activities the role of finance is praiseworthy. Finance is also important for expansion and modernisation of fixed assets.

(4) Necessary to Avail the Business Opportunities: Good opportunities arise various times in business and finance is required in order to avail the opportunity. For example, special discount is possible while purchasing huge quantity of goods, cash discount on cash purchase etc.

(5) Necessary for Marketing Expenditure : In order to run the modern business various types of marketing expenditure has to be done like advertisement, sales promotion, transportation, appointment of intermediaries and so on. A large amount is required for the above expenditure. In this way, finance is very much necessary in order to meet the marketing expenditure.

(6) For Research and Development: A regular research is also required to succeed in the modern business. This is only the reason tha houses open separate department for research and devel of this department big expenditure has to be done. It is true that direct relation with the production but in order to create this department has no direct relation with the production the demand for future consumers this department cannot be

(7) To Increase the Goodwill : Those business houses which have better woodwill can get loan easily as and when required. Many factors are needed in order to create goodwill and finance is one of them.

(8) To Increase in Employment Opportunities : From the view point of all the economic situation the creation of employment is very necessary. In order to increase the employement, the capital expenditure has also to be increased and this is not possible without sufficient finance. As such the position of finance is very important for employment facility.

In this way, it is clear from the above description that finance plays a vital role for business and economy. Finance is also important for the manager of the business, share holders, financial institutions, investors etc.

OBJECTIVES OF FINANCE

In any business institution finance plays an important role. Every business man wants to earn reasonable return on his capital. Basically the object of finance is to get liquidity and profitability. But in broad sense the object of finance is to fulfill the objective of the business. The object of finance may be divided in two parts. They are as follows:

(i) Maximisation of Profit : The traditional object of finance is to earn maximum profit so that the owner of the business may get maximum return on his investment. According to Joel Deam, “In competitive economy, to earn maximum profit is the sole social responsibility.”

(ii) Maximisation of Wealth : In broad sense the aim of finance is to maximise the wealth. To fulfill this objective the responsibility of the finance manager increases. In order to create the business assets many activities are done. Thus according to this concept from the viewpoint of scholars the main object of business should be to maximise the value of assets and not to earn more profit.

From the study of both the viewpoints above, it can be said that to maximise the profit and to maximise the value of assets, both are objects of the business.

TYPES OF FINANCE

There are two types of finance :

(A) Domestic Finance : It includes the following :

(i) Business Finance : Demand and supply of finance for any business is called business finance. The business organisation whether it is sole trade or partnership or joint stock Company, finance is necessary for all. Every business organisation requires finance for fixed and working capital. Long term finance is needed to acquire the fixed assets, modernisation and expansion of business. The static finance is required in order to purchase the permanent capital and also for modernisation and expansion. Similarly finance for working capital is needed to meet the day to day expenses. The source of long term Chance for a big business is issue of shares, issue of debentures and ploughing back of profit and working capital is obtained from financial institutions. As regards small business organisation the source of finance is commercial bank.

(ii) Public Finance : Public finance is one of those subject which lie on me border line between economics and politics. It is concerned with the income and expenditure of public authorities and with the adjustment of the one to je other. According to Bastable, “Public Finance deals the expenditure and income of public authorities of the state and their mutual relation as also with the financial administration and control.”

In modern times, public finance includes four major divisions : (i) Public revenue, (ii) public expenditure, (iii) public debt and (iv) certain problems of the fiscal system as a whole, such as fiscal administration and fiscal policy.

Some adjustments are made in income and expenditure both in public finance and business finance. However there are many similarities in the problems of both the finance but there are some differences. Prof. Kent has said, “What is true of an individual may or may not be true of the state as a whole.” For the arrangement of business financial activities are studied to meet the business need while public finance is that which secures the maximum social advantage from the operation which it conducts.

(iii) Institutional Finance : The institutional finance plays a leading role in the industrial development of a country. The finance is needed for the establishment, expansion and working capital of the industry. Long term finance is needed for fixed assets and short term finance is needed for working capital. Long long ago when capital market was not developed then institutional finance was the only source of industrial finance. These institutions are still important, but now these are merged into money market.

In India, the institutional finance has been classified in the following ways:

Finance Meaning Role Objectives

All India Financial Institutions)

1 Industrial Development Bank of India (IDBI)

2. Industrial Credit and Investment Corporation of India (ICICI)

3. Industrial Finance Corporation of India (IFCI)

4. Industrial Investment Bank of India (IIBI)

5. Small Industries Development Bank of India (SIDBI)

State-Level Institutions

6. State Finance Corporation (SFCs)

7. State Industrial Development Corporation (SIDCs)

Investment Institutions

8. Unit Trust of India (UTI)

9. Life Insurance Corporation of India (LIC)

10. General Insurance Corporation (GIC)

Specialized Financial Institutions

11. Export-Import Bank of India (EXIM Bank)

12. Tourism Finance Corporation Bank of India (TFCI)

Among the above mentioned financial institutions, IDBI has now been converted into IDBI Ltd. in 2004. After this conversion the assistance of IDBI came under Indian Company Law, 1956. Again this was merged with IDBI Bank. Similarly, the Indian Industrial investment Bank was reorganised as IRBI in 1985. Again on 6th March, 1997 an act was passed by the Indian Parliament and this became IIBIL Bank and thereafter this started working under the Indian Company Act, 1956.

(iv) Long Term, Middle Term and Short Term Finance : The long term finance covers the period of 5 to 10 years. The industrialists require this kind of finance in order to construction of building, to acquire machinery and expansion of factories. The industrialists have to take help from capital market or specialised financial institutions.

The middle term finance covers the period of 1 to 5 years. This kind of finance is required for purchase of small machineries and equipments and the maintenance of the building.

The short-term finance covers the period of only a few days. Short term finance is needed to meet the revenue expenditure. Medium term and short term finance is supplied by commercial banks.

(v) Agricultural Finance : In order to run the agricultural works and also to purchase the agriculture related tools, the agricultural finance is required. There are many institutions to provide agricultural loans and some of them cover rural level, district level, state level and also the national level. Among these institutions, the co-operative bank, Regional Rural banks, industrial banks and NABARD are important banks.

(B) International Finance: The international finance plays an important role in the economic development of a country. On the international level many financial institutions are established from time to time with the aim of helping the poor countries and further on it provides concessional help to the country or countries so that the standard of living of people may rise up.

After Second World War, all the international institution which has been established, the World Bank has received maximum success. Brettonwoods Conference, the WTO along with International IBRD was also established. This institution was also helped by International Development Association and is popularly named as IDA.

Among the international financial organisation, the World Bank, the International Monetary Fund, International Financial Corporation, Asian Development Bank etc. are principal institutions. From these institutions, the international contribution, development loan and technical help is provided to countries which are the members of the above institutions.

 EXERCISE QUESTIONS

Long Answer Type Questions

1 What do you mean by finance ? Discuss the importance of finance.

2. What is finance ? Explain the role of finance in the development of economy.

3. Discuss the different types of finance.

Short Answer Type Questions

1 Define finance.

2. What are the objectives of finance ?

3. Explain the traditional concept of finance.

4. Explain the modern concept of finance.

III. Objective Type Questions

Choose the correct option

1 “Finance is an art and science of raising and spending money.” Who gave this definition ?

(a) Hastings

(b) J. L. Braidle

(c) F. W. Paish

(d) J. L. Massie

2. Role of finance is :

(a) For the establishment of business

(b) For the operation of business

(c) For research and development

(d) All of the above

3. The objective of finance is :

(a) To maximise the profit

(b) To maximise the asset

(c) Both of the above

(d) None of the above

4. Which of the following is a type of finance ?

(a) Business finance

(b) Public finance

(c) Institutional finance

(d) All of the above

5. Unit Trust of India is :

(a) Investment institution

(b) Specialised financial institution

(c) All India financial institutions

(d) State level financial institution

6. Which one is specialised financial institution ?

(a) SIDBI

(b) TFCI

(c) SFC

(d) All of the above

Ans. 1. (a), 2. (d), 3. (c), 4. (d), 5. (a), 6. (b).]

Finance Meaning Role Objectives

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