Managing the

Finance
Function
WHERE DO THIS FUNDS CAME FROM?
 What the Finance
Function is
• Procurement and administration of funds with
the view of achieving the objectives of
business
• One of the three basic management functions
aside from production and marketing

Engineer Manager must be concerned with:

Determination of the amount of funds required, when they
are needed, how to procure them, and how to effectively and
efficiently use them.
 Figure 12.1
The Finance Function: A Process Flow

Effective
Determination
Procurement and Efficient
of Fund
of Funds use of
Requirements
Funds

1. Short-term 1. Short-term 1. Short-term

2. Long-term 2. Long-term 2. Long-term
STEP 1:
The Determination of Fund
Requirements
(1) To finance daily
operations

To finance the (2)

firm’s credit
services

(3) To finance the

purchase of
inventory

To finance the
purchase of (4)
major assets (4)
 (1)
To finance daily
operations
Money must be made available for the purchase of the following:

1. Wages and salaries

2. Rent
3. Taxes
4. Power and light
5. Marketing expenses like those for advertising, entertainment, travel
expenses, telephone, and telegraph, stationery and printing,
postage, etc.
6. Administrative expenses like those for auditing, legal, services, etc.

ANY DELAY IN THE SETTLEMENT OF THE FOREGOING EXPENSES MAY DISRUPT THE EFFECTIVE
FLOW OF WORK IN THE COMPANY. IT MAY ALSO ERODE THE PUBLIC CONFIDENCE IN THE ABILITY
OF THE COMPANY TO OPERATE ON A LONG-TERM BASIS.

CREDITORS, FOR INSTANCE, MAY WITHHOLD THE EXTENSION OF CREDIT TO THE COMPANY.
(2) To finance the firm’s credit
services

It is oftentimes unavoidable for firms to extend credit

to customers.

HOW THE CREDIT ARRANGEMENT WILL BE FINANCED

(3) To finance the purchase of
Inventory

The maintenance of adequate inventory is crucial to

many firms. Raw materials, supplies, and parts are
needed to be kept in storage so they will be available
when needed.

The purchase of adequate inventory will require

sufficient funding and this must be secured.
(4)
To finance the purchase of major
assets

Companies, at times, need to purchase major assets.

When top management decides on expansion, there
will be a need to make investments in capital assets
like land, plant, and equipment.
Financing of the purchase of major assets must come
from long-term sources.
The Sources of Funds

Cash sales Sale of Assets

Collection of Ownership
accounts
Receivables Contributions

Loans and credits

Advances from
Customers
 SUPPLIES OF SHORT-TERM FUNDS
SHORT TERM FINANCING IS PROVIDED
BY THE FOLLOWING:

• Trade creditors
• Refer to suppliers extending credit to a buyer
for use in manufacturing, processing or
reselling goods for profit.
• Instrument used in trade credit:
• Open book credit
• Trade acceptance
• Promissory notes
• Commercial Banks
• Institutions which individuals or firms may top as source
of short term financing.
• Two types of short term loan:
• Those which require collateral
• Those which do not require collateral

• Commercial Paper Houses

• Are those that help business firms in borrowing funds
from money market.

• Business Finance Companies

• Financial institutions that the finance inventory and
equipment of almost all types and sizes of business
firms.
• Factors
• Institution that buy the accounts receivables of firms,,
assuming complete accounting and collection
responsibilities.

• Insurance Companies
• These are also possible sources of short term funds.
 LONG-TERM SOURCES OF
FUNDS:

• There are instance when engineering firm will have

to top the long term sources of funds. An example
is when expenditures for capital assets become
necessary.
• Long term sources of funds are classified as follows:
• Long terms debts
• Term loans – it is a commercial or industrial loan from a
commercial bank, commonly used for plant and equipment,
working capital, or debt repayment.
• Bonds – it is a certificate of indebtedness issued by a
corporation to a lender
• Common stocks
• It is consist of issuance of common stocks.
• When properly utilized, common stocks can be cheaper
and more stable sources of long term funds.
• Common stocks do not have maturity and repayment
dates.

• Retained earnings
• It refer to “corporate earnings not paid out as dividends”
• This simply means that whatever earnings that are due to
the stock holders of a corporation are reinvested.
 THE BEST SOURCE OF FINANCING:

Factors to be considered to determine the best source

(by schall and Hayley )

• Flexibility
• Some fund sources impose certain restriction on the
activities of the borrowers
• As some fund sources are less restrictive, the flexibility factor
must be considered.

• Risk
• Risk refers to the chance that the company will be
affected adversely when a particular source of
financing is chosen.
• Income
• When the firm borrows, it must generate enough
income to cover the cost of barrowing and still be left
with sufficient returns for the owns.

• Control
• When new owners are taken in because of the need for
additional capital, the current group of owner may lose
control of the firm, to avoid this, they must consider
other means of financing.

• Timing
• The engineer must, therefore choose the best time for
barrowing or selling equity.
• Other Factors
• Collateral values
• Flotation cost
• Speed
• Exposure
 THE FIRM’S
FINANCIAL HEALTH
In general, the objectives of engineering firms are
as follows:
• To make profits for the owners:
• To satisfy creditors with the repayment of loads
plus interest:
• To maintain the viability of the firm so that
costumers will be assured of a continuous supply
of products or services, employees will be assured
of employment, suppliers will be assured of
market, etc.
THE FIRM’S FINANCIAL
HEALTH
Objectives of engineering firms:
1. To make profits for the owners;
2. To satisfy creditors with the repayment of loans plus
interest;
3. To maintain the visibility of the firm so that customers
will be assured of a continuous supply of products or
services, employees will be assured of a market, etc.
INDICATORS OF FINANCIAL
HEALTH
Three basic financial statements
1. Balance Sheet - also called statement of
financial position
2. Income Statement - also called statement of
operations
3. Statement of changes in financial position
RISK
MANAGEMENT
AND
INSURANCE
RISK DEFINED

Refers to the uncertainty concerning loss

or injury
RISKS IN ENGINEERING
FIRM

Fire Theft Floods

RISKS IN ENGINEERING
FIRM

Disability
Accidents Bad Debts
& Death
RISKS IN ENGINEERING
FIRM

Damage claim from other parties

 TYPES OF RISK
PURE RISK SPECULATIV
E RISK
is one in which is one in which
“there is only a there is a change of
chance of loss”. This either loss or gain.
means that there is no
This type of risk is
way in making gains
with pure risks.
not insurable.

KIKI
WHAT IS RISK
MANAGEMENT?
It is “an organized strategy for protecting and
conserving assets and people.”
The purpose of risk management is “to choose
intelligently from among all the available methods of
dealing with risk in order to secure the economic
survival of the firm”
It is designed to deal with pure risks, while the
application of sound management practices are directed
towards speculative risks that are inherent and cannot be
avoided.
METHODS OF DEALING WITH
RISK
1. The risk may be avoided
2. The risk may be retained
3. The hazard may be reduced
4. The losses may be reduced
5. The risk may be shifted
RISK RETENTION

Is a method of handling risk wherein the

management assumes the risk. A planned risk
retention, also called self – insurance, is a conscious
and deliberate assumption of a recognized risk
THE HAZARD MAY BE
REDUCED
Hazard may be reduced by simply
instituting appropriate measures in a variety
of business activities
REDUCING LOSSES
When losses occur in spite if preventive measures, the
severity of loss may be limited by way of reducing the
concentration exposures. Examples:
1. Physically separating buildings to minimize losses in case
of fire;
2. Using fireproof materials on interior building construction
3. Storing inventory in several locations to minimize losses
in cases of fire and theft;
4. Maintaining duplicate records to reduce accounts
receivable losses;
5. Transporting goods in separate vehicles instead
of concentrating high values in single shipments;

6. Prohibiting key employees from travelling

together;

7. Limiting legal liability by forming several

separate corporations
SHIFTING RISK

• Hedging – refers to making commitments on both

sides of a transaction so the risks offset each other
• Subcontracting
• Incorporation
• Insurance