One tailoring shop, one sewing machine, a little saving in hand. The machine runs and the orders are there, yet halfway through the month there is no money for thread. The fault is not the machine's, it is the money plan's. That plan is called finance.
1. Finance means collecting and using
Finance deals with fund management. It prepares the plan, and carries it out, for what amount of fund to collect from which sources, and where and how to invest it so the project earns the highest profit. The definition is short: finance means the process related to fund collection and utilization.
In a business, fund flows in from selling products. Buying machinery, buying raw materials and paying wages to workers are all uses of fund, because money is spent to produce and buy goods. Of the eight chips below, which are sources and which are uses?
sort themchip, then bin
Where fund comes from, where it goes
Pick up a chip, then drop it in a bin. One question: is the money coming in, or going out?
Right. Next one.
Not yet. Ask: does this bring fund in, or spend the fund already collected?
All in place. Money from sales and a loan from relatives bring fund in, so they are sources. Machinery, raw materials and wages spend it, so they are uses. Repaying a loan sends money out as well.
2. The tailor's money trail
Say a tailor opens a shop. At the start he pays for the sewing machine, thread, buttons and scissors out of his own saving. If the fund looks too small, he may take a loan from his relatives to cover the shortage.
Once the shop is running, at the end of every month he pays the workers' wages, the house rent and the electricity bill. He pays them from the money earned by sewing clothes, and he plans to pay back the loan from this same monthly collection. Now put the steps in order.
which firstwhich step comes first?
The tailor's money trail
What does the shop's opening day begin with?
Yes. Then?
Not yet. Ask what must already have happened before this step. Without earnings there is no money to pay wages, and without a machine there are no earnings.
Right order. Own saving first, a loan if it falls short. Earnings come only once the machine runs. Only then are wages, rent and bill paid at month end, and the loan is repaid from that same monthly collection. So finance is not only borrowing: it is collecting, using and repaying.
The tailor always hopes that after meeting every necessary expense from his income, some profit will be left. He can save it for the future or put it into expanding the shop.
3. Without a plan
The same tailor's month, day by day. Drag the days forward and see where the cash in hand gets stuck. Then plan a source ahead and run the same month again.
the tailor's monthdrag the days
With a plan and without
The amounts and days are imaginary, only to show the idea.
To keep production running without a break, fund has to be collected in a planned way, as the need arises. Without a plan, a cash crisis means thread cannot be bought in time, so customers go back. If there is no money to replace an old machine with a new one, the business may even have to shut down. Tap each outcome.
what followstap each outcome
Without a plan
Cash crisis. With no cash in hand, thread cannot be bought in time.
Customers go back. When the thread is late, the work cannot be delivered, so customers go back.
No money for a new machine. With no money to replace an old machine by a new one, the business may have to shut down.
Planned sources. When fund is collected in a planned way as the need arises, production stays uninterrupted.
All four seen. The first three come from having no plan, the fourth from having one.
4. Why business needs finance
Business finance discusses when, why and how much fund is needed, and from which sources it should be collected.
Why did this become necessary? Society and civilization moved forward, science and technology developed, and so the scope of trade and commerce grew. The product-market now faces competition from many sides. To make a profit in that competition, a businessman has to use his capital (money) well, through sound planning.
Every business collects the fund it needs from the most desirable sources. It studies information from the product-market and invests the fund in the most suitable project. This sets up an inflow and an outflow of fund in the business.
Financial management helps a businessman earn enough profit even from a small amount of capital. That is why finance is used today as the main driving force of business. Turn the two definition cards over.
definitionstap to turn over
Definition flip
QuestionWhat is finance?
AnswerThe process related to fund collection and utilization.
QuestionWhich questions does business finance answer?
AnswerWhen, why and how much fund is needed, and from which sources it will come.
By the end of the chapter you will be able to do six things: explain the concept, evolution, classification, importance and principles of finance, and describe the functions of a financial manager. The six are the chapter's six sections, and this is the first.
5. Check yourself
Three questions. The first goes after the definition.
check yourselfpick one answer
Question 1
What does finance deal with?
This is not the answer to this question. The book says: Finance deals with fund management.
Right. The book says: Finance deals with fund management.
This is not the answer to this question. The book says: Finance deals with fund management.
This is not the answer to this question. The book says: Finance deals with fund management.
For the second, recall the tailor's story.
check yourselfpick one answer
Question 2
A tailor shop owner always expects-
i. to make some profit after meeting expenses from income ii. to be able to save for the future iii. to be able to expand the business
This option does not match which statements are true; the true ones are i, ii and iii. The book says: An owner of a tailoring shop always expects some profit even after meeting all necessary expenditures from business income, which he can save for the future or use for business expansion.
This option does not match which statements are true; the true ones are i, ii and iii. The book says: An owner of a tailoring shop always expects some profit even after meeting all necessary expenditures from business income, which he can save for the future or use for business expansion.
This option does not match which statements are true; the true ones are i, ii and iii. The book says: An owner of a tailoring shop always expects some profit even after meeting all necessary expenditures from business income, which he can save for the future or use for business expansion.
Right. The true statements are i, ii and iii. The book says: An owner of a tailoring shop always expects some profit even after meeting all necessary expenditures from business income, which he can save for the future or use for business expansion.
Take your time over the last one.
check yourselfpick one answer
Question 3
From which source does a tailor shop owner meet the cost of sewing machines, thread, buttons and scissors at the start of the business?
This is not the answer to this question. The book says: At the beginning, the owner of a tailoring shop bears the expenses of sewing machines, threads, buttons and scissors from his own saving.
This is not the answer to this question. The book says: At the beginning, the owner of a tailoring shop bears the expenses of sewing machines, threads, buttons and scissors from his own saving.
Right. The book says: At the beginning, the owner of a tailoring shop bears the expenses of sewing machines, threads, buttons and scissors from his own saving.
This is not the answer to this question. The book says: At the beginning, the owner of a tailoring shop bears the expenses of sewing machines, threads, buttons and scissors from his own saving.
The whole section on seven cards.
cut from the notetap to turn over
Seven cards
QuestionWhat is the process of fund collection and utilization called?
AnswerFinance.
QuestionAre buying machinery and raw materials and paying wages a source or a use of fund? Why?
AnswerA use of fund, because fund is spent to produce and buy goods.
QuestionFrom which money does the tailor pay monthly wages, rent and electricity bill?
AnswerFrom the money earned by sewing clothes each month.
QuestionWhat may a cash crisis cause in a tailoring shop that has no financial plan?
AnswerThread cannot be bought in time, so customers go back.
QuestionWhich questions does business finance answer?
AnswerWhen, why and how much fund is needed and from which sources it should be collected.
QuestionWhat must a businessman do to make profit in competition?
AnswerUse his capital efficiently through proper planning.
QuestionWhat is used nowadays as the main driving force of business?
AnswerFinance.
Source: Finance and Banking, Classes 9-10 (NCTB), Chapter 1 “Finance and Business Finance”, section 1.1.