MANAGING FINANCE

FUNCTIONS
GROUP 1 -ENGINNERING MANAGEMENT
 PART.ONE
01
Finance Function
Table of PART.TWO
02

Contents Determination of Fund Requirements

PART.THREE
03
The Sources of Funds

PART.FOUR
04
The Best Sources of Financing
 PART.FIVE
05
The Firm’s Financial Health

PART.SIX
06
Indicator’s of Financial Health

PART.SEVEN
07
Risk Management and Insurance
 01

Finance Function
PART.ONE
 Finance Function
The Finance Function is a part of financial
management. Financial Management is
the activity concerned with the control
and planning of financial resources.

In business, the finance function involves

the acquiring and utilization of funds
necessary for efficient operations. Finance
is the lifeblood of business without it
things wouldn’t run smoothly. It is the
source to run any organization, it
provides the money, it acquires the
money.
411 Objectives of Finance Functions

Investment Decisions Dividend Decisions

Financing Decisions Liquidity Decisions

 411 Objectives of Finance Functions
Here a company decides where to raise
funds from. They are two main sources
to consider mainly equity and borrowed.
From the two a decision on the
appropriate mix of short and long-term
financing should be made. The sources
of financing best at a given time should
also be agreed upon.
Liquidity means that a firm has enough
money to pay its bills when they are due
and have sufficient cash reserves to
meet unforeseen emergencies. This
decision involves the management of
the current assets so you don’t become
insolvent or fail to make payments.
This is where the finance manager
decides where to put the company funds.
Investment decisions relating to the
management of working capital, capital
budgeting decisions, management of
mergers, buying or leasing of assets.
Investment decisions should create
revenue, profits and save costs.
These are decisions as to how
much, how frequent and in what
form to return cash to owners. A
balance between profits retained
and the amount paid out as
dividends should be decided here.
 2017 Why a Business Needs The Finance
Functions

Helps Establish
A
a Business
Helps Run a
B
Business
To Expand,
Modernize, C
Diversify
Purchase
D
Assets
2017 Why a Business Needs The Finance
Functions
Helps Establish a Business
Helps Run a Business
Without money, you cannot get labor, land and
so on with the finance function you can
determine what is required to start your business
and plan for it.
To remain in business you must cater to the day
to day operating costs such as paying salaries,
buying stationery, raw material, the finance
function ensures you always have adequate funds
to cater to this.

A business needs to grow otherwise it may

become redundant in no time. With the finance
To Expand, Modernize,
function, you can determine and acquire the
Diversify funds required to do so.
You need money to purchase assets. This can be
Purchase Assets tangible assets like furniture, buildings or
intangible like trademarks, patents, etc. to get this
you need finances
 02
Determination of
Fund Requirements
PART.TWO
 411 Determination of Fund Requirements
FINANCE DAILY OPERATIONS

1
FINANCE THE FINANCE THE
PURCHASE OF FIRM’S CREDIT
MAJOR ASSETS SERVICES
3 2
 411 Determination of Fund Requirements

1 FINANCE THE FIRM’S CREDIT SERVICES

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 ;

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.
6. administrative expenses like those for auditing, legal, services.
 411 Determination of Fund Requirements

2 FINANCE THE FIRM’S CREDIT SERVICES

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.

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.
 411 Determination of Fund Requirements

FINANCE THE PURCHASE OF MAJOR ASSETS

3
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.

It is obvious that the financing of the purchase of major assets must come
from long-term sources.
 03

The Sources of Funds

PART.THREE
411 THE SOURCES OF FUNDS
To finance its various activities, the engineering firm will have to
make use of its cash inflows coming from various sources, namely
Advances from Ownership contribution
customers

Collection of Loans and Credits

Accounts Receivables

Cash sales Sales Assets

411 Classification of Sources of Funds

Based On Time Period

Sources are classified as long-term,
medium term, and short term

Based On Ownership And Control

Three
Sources are classified as owned and
Classifications
borrowed capital

Based On Sources Of Generation Of Capital

Sources are classified as internal

sources and external
 411 Classification of Sources of Funds
Short-term sources
Funds which are required for a period not exceeding one
year are called short-term sources. Trade credit, loans from
commercial banks and commercial papers are the examples
of the sources that provide funds for short duration.

Short term sources of funds are those with repayment

schedules of less than one year. Collaterals are sometimes
required by short term creditors.
 411 Classification of Sources of Funds
Short-term sources
Advantages of short term credits.

• When the engineering firm avails of short term credits the

following advantages may be derived;
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.
2. short-term financing is often less costly. Since short term financing
is favored by creditors.
3. short-term financing offers flexibility to the borrower.
 411 Classification of Sources of Funds
Short-term sources
Disadvantages of short term credits.

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.
2. 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.
 411 Classification of Sources of Funds
Short-term sources
SUPPLIES OF SHORT TERM-FUNDS

Short term financing is provided by the following;

1. trade creditors
2. commercial banks
3. commercial paper houses
4. finance companies
5. factors
6. insurance companies
 411 Classification of Sources of Funds
Medium-term sources

1. Preference Capital or Preference Shares.

2. Debenture / Bonds.
3. Financial Institutes, Government, and Commercial Banks.
4. Lease Finance.
5. Hire Purchase Finance
 411 Classification of Sources of Funds
Medium-term sources
Advantages of medium term credits.
• Set Monthly or Bimonthly Payments – Regular payments, spaced one month or two
weeks apart, can be a great thing for businesses that are trying to budget for fixed
costs.
• Fixed Interest Rates – Medium-term loans usually have fixed interest rates. Having a
set interest rate on a loan helps a business owner to know exactly what that loan is
costing them over time.
• Improved Credit Score – Receiving and successfully paying off a medium-term loan
will improve an owner’s credit score and help you build business credit. As they
move forward with their business, they will be more likely to get additional loans.
• Many Uses Covered – Medium-term loans can be used for a variety of business
purposes.
 411 Classification of Sources of Funds
Medium-term sources
Disadvantages of medium term credits.

• Longer Application Process – Medium-term loans require slightly more

paperwork and have a longer turnaround than short-term loans. However,
they are still quick to get compared to long-term loans.
• Harder to Qualify – If you don’t have good credit or cash flow, you might
not be able to qualify for a medium-term loan. These loans can also require
collateral.
• Fees and Penalties – Term loans can come with origination fees and
prepayment penalties, so be sure to speak with your lender. You should be
aware of all your obligations.
 411 Classification of Sources of Funds
Long-term sources
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,
3. Retained earnings long-term debts are sub-classified into term
loans and bonds.
 411 Classification of Sources of Funds
Long-term sources
Advantages of long term credits.

1. Funds can be generated more quickly than other long-term

sources.
2. They are flexible example, they can be easily tailored to the needs
of the borrower.
3. The cost of issuance is long compared to other long-term sources.
 04

The Best Sources of

Financing
PART.FOUR
 2017 The Best Sources of Financing
To determine the best source, Schall and Haley recommends that the following
factors must be considered
Control
04
Income
05
Timing
03

06
Other factors like Risk
collateral values, 02
floatation cost,
01
speed, and FLEXIBILITY
exposure
 411 The Best Sources of Financing

FLEXIBILITY
01 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.

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
 411 The Best Sources of Financing

RISK
02 When applied to the determination of fund sources, risk
refers to the chance that the company will be affected
adversely when a particular source of financing is chosen.

Generally short-term “subject the borrowing firm to more

risk than does financing with long term debt. “this happens
because of two reasons;
1. short-term debts may not be renewed with the same term
as the previous one, if they can be renewed at all.
2. since repayments are done more often, the risk of
defaulting is greater.
 411 The Best Sources of Financing

Income
03 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.
It is possible that 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.
 411 The Best Sources of Financing
Control
04 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.
Timing
05 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.
 411 The Best Sources of Financing

OTHER FACTORS
06 1. Collateral values: are there assets available as
collateral?
2. Floatation cost: how much will it cost to issue bonds
or stocks?
3. Speed : how fast can the funds required be raised?
4. Exposure : to what extent will the firm be exposed to
other parties?
 05

The Firm’s Financial

Health
PART.FIVE
 411 The Firm’s Financial Health

Maintain viability of
so that costumers will
Satisfy be assured of a
Make creditors with continuous supply of
profits for the repayment products or services,
the owners of loans plus employees will be
interest assured of
employment ,
suppliers will be
The foregoing objectives have better chances of achievement if the assured of market.
engineering firm is financially healthy and has the capacity to be so on
a long-term basis
 06

Indicator’s of
Financial Health
PART.SIX
2017 competitor analysis
The financial health of an engineering firm may be determined
with the use of three basic financial statements. These are as
follows
 07

Risk Management and

Insurance
PART.SEVEN
411 Risk Management and Insurance
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;

Fire Theft Flood Accident

Damage
Bad Disability claim
and from
debts other
death
parties
 411 Risk Management and Insurance
TYPE OF RISK
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 company’s

motor car due to theft. Pure risk are insurable and may be covered by
insurance, 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
 411 Risk Management and Insurance
RISK MANAGEMENT
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.
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
 411 Risk Management and Insurance
METHODS OF RISK MANAGEMENT
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
 411 Risk Management and Insurance
METHODS OF RISK MANAGEMENT

Hazards may be reduced by simply instituting appropriate

measures in a variety of business activities. An example is
prohibiting unauthorized persons to enter the cashier’s
office. This will reduce the hazard of theft. Another example
is prohibiting company drivers from taking alcohol or drugs
while on duty.
 411 Risk Management and Insurance
METHODS OF RISK MANAGEMENT
When losses occur in spite of preventive measures, the severity of loss
may be limited by way of reducing the concentration of exposures.

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. 6. prohibiting key employees from travelling together;
7. limiting legal liability by forming several separate corporations.
 411 Risk Management and Insurance
METHODS OF RISK MANAGEMENT
When a constructor is confronted with a contract bigger than his company’s
capabilities, he may invite sub-constructors in so that some of the risk may be
shifted to them.

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 contribution.

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.
Thank you all for listening.
ENGINEERING MANAGEMENT