CHAPTER 10
Financial Management and Planning

Review Exercise 

1. Indicate if the following statements are ‘True’ or ‘False’. 

(i) Budget is the first step in money management. (True/False) ________ 

(ii) Money serves as a medium of exchange of commodities. (True/False) _________ 

(iii) Profits from business and gifts are a form of income. (True/False) _________ 

(iv) One should first estimate the cost and then list the commodities and services needed while making the budget. (True/False) _________ 

(v) Savings in physical assets are productive in economic terms. (True/False) _________ 

(vi) The trend in business cycle is an important consideration under the principal of safety. (True/False) _________ 

(vii) The time period may be ignored while considering and deciding on an investment. (True/False) _________ 

(viii) The 4 C’s of credit are character, capacity, capital and collateral (True/False) _________ 

(ix) Nature of enterprise is not an important safety consideration. (True/False) ________

Answer: (i) Budget is the first step in money management. (True/False) True

(ii) Money serves as a medium of exchange of commodities. (True/False) True

(iii) Profits from business and gifts are a form of income. (True/False) True

(iv) One should first estimate the cost and then list the commodities and services needed while making the budget. (True/False) False

(v) Savings in physical assets are productive in economic terms. (True/False) True

(vi) The trend in business cycle is an important consideration under the principal of safety. (True/False) False

(vii) The time period may be ignored while considering and deciding on an investment. (True/False) False

(viii) The 4 C’s of credit are character, capacity, capital, and collateral. (True/False) True

(ix) Nature of enterprise is not an important safety consideration. (True/False) False

Review Questions 

(i) What do you understand by ‘management of finances’? 

Answer: (i) Management of Finances:
Management of finances refers to the systematic and strategic control, allocation, and utilization of financial resources to achieve specific financial goals and objectives. It involves making informed decisions about how to obtain, allocate, and manage funds to ensure that an individual, business, or organization can meet its financial obligations, invest in opportunities, and plan for the future. Financial management encompasses various activities, such as budgeting, financial planning, investing, risk management, and monitoring financial performance.

(ii) Discuss the different types of income. 

Answer: (ii) Different Types of Income:
Income can be categorized into various types based on its source and nature:

Earned Income: This is income earned through active participation in work or business activities. It includes salaries, wages, commissions, and self-employment earnings.

Passive Income: Passive income is earned without active involvement or regular work. Examples include rental income, dividend income from investments, and royalties.

Investment Income: This income is generated from investments, such as interest from savings accounts, capital gains from stocks and real estate, and dividend income from stocks.

Portfolio Income: Portfolio income is derived from the sale of investments, such as stocks and bonds. It includes both short-term and long-term capital gains.

Business Income: Business income is the profit earned by a business after deducting all expenses, including salaries, operating costs, and taxes.

Other Income: This category includes income from various sources, like lottery winnings, alimony, and other irregular sources of income.

(iii) Discuss the steps in making a budget. 

Answer: (iii) Steps in Making a Budget:
Creating a budget involves planning and tracking your income and expenses to manage your finances effectively. Here are the steps in 

making a budget:

Set Financial Goals: Define your financial objectives, such as saving for a vacation, paying off debt, or building an emergency fund.

Gather Financial Information: Collect information on your income, expenses, debts, and assets.

Calculate Your Income: Determine your total monthly income from all sources, including salary, investments, and any other sources.

List Your Expenses: Identify and categorize your monthly expenses, including fixed (e.g., rent, mortgage) and variable (e.g., groceries, entertainment).

Differentiate Between Needs and Wants: Distinguish between essential expenses (needs) and discretionary spending (wants).

Create a Budget: Allocate your income to cover your needs first, and then allocate funds for wants and savings. Ensure that your expenses do not exceed your income.

Monitor and Adjust: Regularly track your spending and compare it to your budget. Make adjustments as necessary to stay within your budget.

Build an Emergency Fund: Allocate a portion of your income to an emergency fund to cover unexpected expenses.

Pay Down Debt: If you have outstanding debts, allocate extra funds to pay them off faster.

(iv) What are the controls that can be exercised in money management? 

Answer: (iv) Controls in Money Management:
Effective money management involves implementing controls to manage finances wisely. Some key controls include:

Budgeting: As discussed above, creating and adhering to a budget is a fundamental control for managing expenses and ensuring you live within your means.

Savings: Establish savings goals and regularly set aside a portion of your income for savings and investments.

Emergency Fund: Maintain an emergency fund to cover unexpected expenses, such as medical bills or car repairs.

Debt Management: Control and reduce debt through responsible borrowing and consistent repayment.

Investment Diversification: Diversify your investments to spread risk and potentially increase returns.

Risk Management: Purchase insurance to protect against financial risks, such as health, home, and auto insurance.

Regular Monitoring: Continuously monitor your financial accounts and transactions to identify any discrepancies or fraudulent activities.

(v) Discuss the principles underlying sound investments.

Answer: (v) Principles of Sound Investments:
Sound investments are based on several key principles:

Diversification: Spread investments across various asset classes (stocks, bonds, real estate) to reduce risk and increase the likelihood of positive returns.

Risk Tolerance: Assess your risk tolerance and invest accordingly. Consider your investment horizon, financial goals, and comfort with market fluctuations.

Research: Conduct thorough research before making any investment decisions. Understand the assets or investments you plan to buy.

Long-Term Perspective: Invest with a long-term perspective, as long-term investments tend to outperform short-term strategies.

Cost Management: Minimise investment costs, such as fees and taxes, as they can erode returns over time.

Regular Review: Periodically review and adjust your investment portfolio to ensure it aligns with your goals and risk tolerance.

Professional Advice: Seek advice from financial advisors or professionals when needed, especially for complex investments or financial planning.

Avoid Emotional Decisions: Avoid making impulsive investment decisions based on emotions. Stick to your investment strategy.

Remember that there is no one-size-fits-all approach to sound investments, and individual circumstances and goals play a significant role in shaping investment choices.