Managing the finance function

1. 1. MANAGING THE FINANCE FUNCTION

2. 2. Engineering firms need funds to finance their operations. To be assured of continuous
supply of funds, there is a need to manage properly the finance function. When funds are
made available in right amounts at the right time, the engineering organization may be
expected to function properly. When funds are not enough to finance planned activities,
the risk of failure to achieve objectives becomes apparent.
3. 3. The engineer manager must understand that the finance function is very important
management concern. This is true because without adequate funds it will be difficult.
4. 4. WHAT THE FINANCE FUNCTION IS ???
5. 5. The finance function is an important management responsibility that deals with the
procurement and administration of funds with the view of achieving the objectives of
business.
6. 6. The finance is one of the three basic management functions. The other two are
production and marketing. In the performance of his duties, the engineer manager, at
whatever management level he is, must do his share in the achievement of the financial
objectives of the company.
7. 7. DETERMINATION OF FUND REQUIREMENTS PPROCUREMENT OF FUNDS
EFFECTIVE AND EFFICIENT USE OF FUNDS 1.Short term 2.long-term 1.Short-term
2. Long term 1.Short- term 2. long term
8. 8. 3.to finance the purchase of major assets. 2.to finance the firms credit services. 1.
to finance daily operations. Any organization, including the engineering firm, will need
funds for the following specific requirements. THE DETERMINATION OF FUND
REQUIREMENTS
9. 9. 6. administrative expenses like those for auditing, legal, services. 5. marketing
expenses like those for advertising, entertainment, travel expenses, telephone and
telegraph, stationery and printing, postage. 4.power and light 3.taxes 2. rent 1.
wages and salaries The day-to-day operations of the engineering firm will require funds
to take care of expresses as they come. Money must be made available for the payment
of the following ; FINANCING DAILY OPERATIONS
10. 10. When a new chemical manufacturing firm finds difficulty in convincing distributors to
carry their products, a credit extension may solve the problem. A new problem however
will be created. It is oftentimes unavoidable for firms to extend credit to customers. If the
engineering firm manufactures products, sales terms vary from cash to 90-day credit
extensions to costumers. Constructions firms will have to finance the construction
government projects that will be paid many months later. FINANCING THE FIRMS
CREDIT SERVICES
11. 11. Sometimes, inventories unnecessarily tie up large amount of funds. The purchase
of adequate inventory, however will require sufficient funding and this must be secured.
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. Many firms cannot cope with delays in the availability of the required material
inputs in the production process, so these must be kept ready whenever required.
FINANCING THE PURCHASE OF INVENTORY
12. 12. It is obvious that the financing of the purchase of major assets must come from long-
term sources. 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 THE PURCHASE OF MAJOR
ASSET
13. 13. 6.Advances from customers. 5. Ownership contribution. 4. Sales Assets. 3.
Loans and Credits. 2. Collection of Accounts Recievables. 1. Cash sales. To
finance its various activities, the engineering firm will have to make use of its cash inflows
coming from various sources, namely ; THE SOURCES OF FUNDS
14. 14. Advantages of short term credits. when the engineering firm avails of short term
credits the following advantages may be derived;Loans and credits may be classified as
short-term, medium-term, or long-term. Short term sources of funds are those with
repayment schedules of less than one year. Collaterals are sometimes required by short
term creditors. SHORT TERM SOURCES OF FUNDS
15. 15. 3. short-term financing offers flexibility to the borrower. 2. short-term financing is
often less costly. Since short term financing is favoured by creditors. 1. they are easier
to obtain. Creditors maintain the view that the risk involved in short-term lending Is also
short term credits are made easily available to qualified borrowers.
16. 16. Short-term debts may, at times, be more costly than long- term expenditures, the
frequent renewals, adjustment of terms and shopping for new sources may prove to be
more costly. 1. short term credits mature more frequently. This may please the
engineering firm in a tight position more often than necessary. when the frequency of the
firms cash inflows are more than twelve months apart, the firm could be in serous trouble
meeting its short-term obligations. DISADVANTAGE OF SHORT-TERM CREDITS
17. 17. 6.ibnsurance companies 5. factors and 4. finance companies 3.commercial
paper houses 2.commercial banks 1. trade creditors Short term financing is
provided by the following; SUPPLIES OF SHORT TERM-FUNDS
18. 18. The trade acceptance is a time draft drawn by a seller upon a purchase payable to
the seller as payee, and accepted by the purchaser as evidence that the goods shipped
are satisfactory and that the price is due and payable. The open book credit is
unsecured and permits the customer to pay for goods delivered to him in specified
number of days. Trade creditors refer to suppliers extending credit to a buyer for use in
manufacturing, processing or reselling goods to profit. The instruments used in trade
credit consist of the following; (1) open-book credit, (2) trade acceptance, and (3)
promissory notes.
19. 19. Commercial paper houses are those that help business firms in borrowing funds
from the money market. Under this scheme, the business firm in need of funds issues a
commercial paper which is a short term promissory note, Commercial banks are
institutions which individuals or firms may tap as source of short-term financing.
Commercial banks grant two types of short term financing. Commercial banks grant two
types of short-term loans (1) those which require collateral, and (2) those which do not
require collateral. Examples of commercial banks granting short-term loans are City trust,
Premier Bank, and Land Bank. A promissory note is an unconditional promise in writing
made by one person to another, signed by the maker, engaging to pay, on demand or at
a fixed or determinable future time, a certain sum of money to , or to the order of, a
specified person or to bearer.
20. 20. Insurance companies are also possible sources of short-term funds. Industry reports
indicate that insurance companies in the Philippines regularly make investments in short-
term commercial papers and promisory notes. Factors are institutions that buy the
accounts recievables of firms, assuming complete accounting and collection
responsibilities. Engineering firms which maintain sizable amounts of accounts recievable
may avail of the services of factors when they are in dire need of cash.. Business
finance companies are financial institutions that finance inventory and equipment of
almost all types and sizes of business firms. Examples of finance companies in the
Philippines are Philacor Credit Corporation and Consolidated Orix Leasing and Finance
Corporation.
21. 21. LONG-TERM SOURCES OF FUNDS There are instances when the engineering firm
will have to tap the long-term sources of funds. An example is when expenditures for
capital assets become necessary. After the amount required is determined, a decision
has to be made on the type of sources to be used. Long-term sources of funds are
classified as follows; 1. Long-term debts 2. Common stocks, and 3. retained earnings
long-term debts are sub-classified into term loans and bonds.
22. 22. Term Loans A term loan is a commercial or industrial loan from a commercial bank,
commonly used for plant and equipment, working capital, or debt repayment. Term
loans have maturities of 2 to 30 years.
23. 23. 3. the cost of issuance is long compared to other long-term sources. 2. they are
flexible example, they can be easily tailored to the needs of the borrower. 1. Funds can
be generated more quickly than other long-term sources. The advantages of term loans
as a long-term sources of funds are as follows;
24. 24. The third source of long-term funds consists of the issuance of common stocks.
Since common stocks represents ownership of corporations, many investors are placing
their money in them. common stocks A bond is a certificate of indebtedness issued by
a corporation to a lender. It is a marketable security that the firm sells to raise funds.
Since the ownership of bonds can be transferred to another person, investors are
attracted to buy them. Bonds
25. 25. retained earnings 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. Because these retained earnings can be used by the firm indefinitely, they
become an important source of long-term financing. Retained Earnings
26. 26. 8. income bonds pay interest only when earned 7. bonds with warrants warrants
are option which permit the holder to buy stock of the issuing company at a stated price
6.convertible bonds convertible into shares of common stock 5.subordinated
debentures with an inferior claim over other debts 4.guaranteed bond payment of
interest or principal is guaranteed by one or more individuals or corporation 3.Collateral
trust bond secured by stocks and bonds and bonds owned by the issuing corporation
2.Mortgage bond secured by real estate 1.Debentures no collateral requirement Type
of bond Feature
27. 27. 5. timing 6. other factors like collateral values, floatation cost, speed, and exposure
4.control 3.income 2. risk 1.Flexibility To determine the best source, Schall and
Haley recommends that the following factors must be considered, As there are various
fund sources, the engineer manager, or whoever is in the charge, must determine which
source is the best available to the firm. THE BEST SOURCE OF FINANCING
28. 28. As some fund sources are less restrictive, the flexibility factor must be considered. In
general, however short-term fund sources offer more flexibility than long term-sources.
Some find sources impose certain restrictions on the activities of the borrowers. An
example of a restriction is the prohibition on the issuance of additional debt instruments
by the borrower.
29. 29. When applied to the determination of fund 2. since repayments are done more
often, the risk of defaulting is greater. 1. short-term debts may not be renewed with the
same term as the previous one, if they can be renewed at all. Generally short-term
subject the borrowing firm to more risk than does financing with long term debt. this
happens because of two reasons; sources, risk refers to the chance that the company
will be affected adversely when a particular source of financing is chosen.
30. 30. It is possible that the the owners were enjoying higher rates of return on their
investments before borrowing was made. The reverse may happen, however at other
times. Nevertheless, the effects on income must be considered in determining the source
of funding to be used. The various sources of funds, when availed of will have their own
individual effects in the net income of the engineering firm. When the firm borrows, it
must generate income to cover the cost of borrowing and still be left with sufficient
returns for the owners. INCOME
31. 31. When new owners are taken in because of the need for additional capital, the current
group of owners may lose control of the firm if the current owners do not want this to
happen, they must consider other means of financing.CONTROL
32. 32. The financial market has its ups and downs. This means that there are times when
certain means of financing provide better benefits than at other times. The engineer
manager must, therefore, choose the best time for borrowing or selling equity.TIMING
33. 33. 4. exposure : to what extent will the firm be exposed to other parties? 3. speed :
how fast can the funds required be raised? 2. Floatation cost: how much will it cost to
issue bonds or stocks? 1. collateral values: are there assets available as collateral?
 There are other factors considered in determining the best source of funds. There are as
follows; OTHER FACTORS
34. 34. 3. 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. 2. to satisfy creditors with the repayment of loans
plus interest; 1. to make profits for the owners .. In general, the objectives of
engineering firms are as follows; THE FIRMS FINANCIAL HEALTH
35. 35. The foregoing objectives have better chances of achievement if the engineering firm
is financially healthy and has the capacity to be so on A LONG-TERM BASIS,
36. 36. 3. statement of changes in financial position. 2.income statement also called of
operations; 1. Balance sheet- also called statement of financial position; The financial
health of an engineering firm may be determined with the use of three basic financial
statements. These are as follows; INDICATORS OF FINANCIAL HEALTH
37. 37. fortunately, the engineer manager is not entirely helpless. He can use sound risk
management practices to avoid the threat of bankruptcy due to losses. risk is a very
important concept that the engineer manager must be familiar with risks confront people
everyday. Companies are exposed to them. Newspapers report on daily basis the
destruction of life and property. Companies that could not cope with issues are forced to
shutdown, according to reports. The engineer manager, especially those at the top
level, is entrusted with the function of marking profits for the company. This will happen if
losses brought by improper management of risks are avoided. RISK MANAGEMENT
AND INSURANCE
38. 38. 7. damage claim from other parties. 6. disability and death 5.non-payment of bills
by costumers (bad debts) 4. accidents 3. floods 2. theft 1. fire Risk refers to the
uncertainty concerning loss or injury. The engineering firm is faced with a long list of
exposure to risk, some of which are as follows; RISK DEFINED
39. 39. Speculative risk is one in which there is a chance of either loss or gain. This type of
risk is not insurable. An example of a speculative risk in investment in common stocks
Risk may be classified as either pure or speculative. Pure risk is one in each there is
only a chance of loss, this means that there is no way of making gains with pure risk. An
example of pure risk is the exposure to loss of the companys motor car due to theft. Pure
risk are insurable and may be covered by insurance, TYPE OF RISK
40. 40. WHAT IS RISK MANAGEMENT ??
41. 41. Risk management 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.
42. 42. Risk is designed to deal with pure risks, while the application of sound management
practices are directed towards speculative risk that are inherent and cannot be avoided.
43. 43. 5. the risk may be shifted 4. the losses may be reduced 3. the hazard may be
reduced 2. the risk may be retained 1. the risk may be avoided There are various
methods of dealing with risk, they are as follows; METHODS OF DEALING WITH RISK
44. 44. A person who wants to avoid the risk of losing a property like a house can do by
simply avoiding the ownership of one. There are instances, however, when ownership
cannot be avoided like those for equipment, appliances, and materials used in the
production process, In the case other methods of handling risk must be considered. 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. In this case management decides to pay losses out of
currently available funds.
45. 45. Hazards may be reduced by simply instituting appropriate measures in a variety of
business activities. An example is prohibiting unauthorized persons to enter the cashiers
office. This will reduce the hazard of theft. Another example is prohibiting company
drivers from taking alcohol or drugs while on duty.
46. 46. 7. limiting legal liability by forming several separate corporations. 6. prohibiting key
employees from travelling together; and 5. transporting goods in separate vehicles
 instead of concentrating high values in single shipments; 4. maintaining duplicate
records to reduce accounts recievable losses; 3. storing inventory in several locations
to minimize losses in cases of fire and theft; 2. using fireproof materials on interior
building construction; 1. physically separating buildings to minimize losses in case of
fire, When losses occur in spite of preventive measures, the severity of loss may be
limited by way of reducing the concentration of exposures. Examples of efforts on loss
reduction are as follows;
47. 47. To shift risk to another party, a company buys insurance. When a loss occurs, the
company is reimbursed by the insurer for the loss incurred subject to the term of the
insurance policy. In corporation, a stockholder is able to make profits out of his
investments but without individual responsibility for whatever errors in decisions are
made by the management. The liability of the stockholder is limited to his capital
constribution. When a constructor is confronted with a contract bigger than his
companys capabilities, he may invite sub-constructors in so that some of the risk may be
shifted to them.