MEU 07322 FINANCE AND HUMAN RESOURCES MANAGEMENT

LECTURE NO.1: INTRODUCTION TO FINANCE AND HUMAN

RESOURCES MANAGEMENT

1. DEFINITIONS

1.1 Management

Management in all business and organizational activities is the act of getting

people together to accomplish desired goals and objectives using available
resources efficiently and effectively. Management comprises planning, organizing,
staffing, leading or directing, and controlling an organization (a group of one or
more people or entities) or effort for the purpose of accomplishing a goal.
Resourcing encompasses the deployment and manipulation of human resources,
financial resources, technological resources and natural resources.

1.2 Resources

In economics a resource is defined as a commodity, service, or other asset used

to produce goods and services that meet human needs and wants. Economics
itself has been defined as the study of how society manages its scarce resources.
Economics focuses on resource supply and demand as it influences production of
goods and services to meet human needs and wants. The categories of resources
are: land, labour (human resources), capital and entrepreneurship.

Land includes all natural resources and is viewed as both the site of production
and the source of raw materials.

Natural resources are materials and components (something that can be used)
that can be found within the environment. Every man-made product is composed
of natural resources (at its fundamental level). A natural resource may exist as a
separate entity such as fresh water, and air, as well as a living organism such as a
fish, or it may exist in an alternate form which must be processed to obtain the
resource such as metal ores, oil, and most forms of energy.

A raw material is the basic material from which a good product is manufactured
or made

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 • Labour (human resources) consists of human effort provided in the
creation of products, paid in wage.
• Capital consists of human-made goods or means of production (machinery,
buildings, and other infrastructure) used in the production of other goods
and services, paid in interest.
• Entrepreneurs serve as managers, risk-takers, leaders, and visionaries.

1.3 Human Resources

Human resources are the set of individuals who make up the workforce of an
organization, business sector or an economy. "Human capital" is sometimes used
synonymously with human resources, although human capital typically refers to a
more narrow view; i.e., the knowledge the individuals embody and can contribute
to an organization. Likewise, other terms sometimes used include "manpower",
"talent", "labour" or simply "people".

1.4 Human Resources Management (Formerly called Personnel Management).

The human resources management is an administrative discipline of hiring and

developing employees so that they become more valuable to the organization.
Human Resource management includes (1) conducting job analyses, (2) planning
personnel needs, and recruitment, (3) selecting the right people for the job, (4)
orienting and training, (5) determining and managing wages and salaries, (6)
providing benefits and incentives, (7) appraising performance, (8) resolving
disputes, (9) communicating with all employees at all levels.

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 1.5 Finance

Finance is the study of how investors allocate their assets over time under
conditions of certainty and uncertainty. A key point in finance, which affects
decisions, is the time value of money, which states that a unit of currency today is
worth more than the same unit of currency tomorrow. Finance aims to price assets
based on their risk level, and expected rate of return.

The time value of money is the value of money figuring in a given amount of
interest earned over a given amount of time. The time value of money is the central
concept in finance theory.

For example, $100 of today's money invested for one year and earning 5% interest
will be worth $105 after one year. Therefore, $100 paid now or $105 paid exactly
one year from now both have the same value to the recipient who assumes 5%
interest; using time value of money terminology, $100 invested for one year at 5%
interest has a future value of $10

2. FINANCIAL MANAGEMENT

2.1 Financial Management means planning, organizing, directing and controlling

the financial activities such as procurement and utilization of funds of the
enterprise. It means applying general management principles to financial resources
of the enterprise.

2.2 Objectives of Financial Management

The financial management is generally concerned with procurement, allocation

and control of financial resources of a concern. The objectives can be-

a. To ensure regular and adequate supply of funds to the concern.

b. To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the
shareholders?
c. To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
d. To ensure safety on investment, i.e, funds should be invested in safe
ventures so that adequate rate of return can be achieved.
e. To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt and
equity capital.
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2.3 FUNCTIONS OF FINANCIAL MANAGEMENT

a. Estimation of capital requirements: A finance manager has to make

estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programmes and
policies of a concern. Estimations have to be made in an adequate manner
which increases earning capacity of enterprise.
b. Determination of capital composition: Once the estimation have been
made, the capital structure have to be decided. This involves short- term and
long- term debt equity analysis. This will depend upon the proportion of
equity capital a company is possessing and additional funds which have to
be raised from outside parties.
c. Choice of sources of funds: For additional funds to be procured, a company
has many choices like-
i. Issue of shares and debentures
ii. Loans to be taken from banks and financial institutions
iii. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source
and period of financing.

d. Investment of funds: The finance manager has to decide to allocate funds

into profitable ventures so that there is safety on investment and regular
returns is possible.
e. Disposal of surplus: The net profits decision has to be made by the finance
manager. This can be done in two ways:
i. Dividend declaration - It includes identifying the rate of dividends
and other benefits like bonus.
ii. Retained profits - The volume has to be decided which will depend
upon expansion, innovation, diversification plans of the company.
f. Management of cash: Finance manager has to make decisions with regards
to cash management. Cash is required for many purposes like payment of
wages and salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintenance of enough stock,
purchase of raw materials, etc.
g. Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances. This can
be done through many techniques like ratio analysis, financial forecasting,
cost and profit control, etc.

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2.4 Role of a Financial Manager

Financial activities of a firm are one of the most important and complex activities
of a firm. Therefore, in order to take care of these activities a financial manager
performs all the requisite financial activities.

A financial manager is a person who takes care of all the important financial
functions of an organization. The person in charge should maintain a far
sightedness in order to ensure that the funds are utilized in the most efficient
manner. His actions directly affect the Profitability, growth and goodwill of the
firm.

Following are the main functions of a Financial Manager:

a. Raising of Funds

In order to meet the obligation of the business it is important to have

enough cash and liquidity. A firm can raise funds by the way of equity and
debt. It is the responsibility of a financial manager to decide the ratio
between debt and equity. It is important to maintain a good balance
between equity and debt.

b. Allocation of Funds

Once the funds are raised through different channels the next important
function is to allocate the funds. The funds should be allocated in such a
manner that they are optimally used. In order to allocate funds in the best
possible manner the following point must be considered

▪ The size of the firm and its growth capability

▪ Status of assets whether they are long term or short tem
▪ Mode by which the funds are raised.

These financial decisions directly and indirectly influence other managerial

activities. Hence formation of a good asset mix and proper allocation of
funds is one of the most important activities

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 c. Profit Planning

Profit earning is one of the prime functions of any business organization.

Profit earning is important for survival and sustenance of any organization.
Profit planning refers to proper usage of the profit generated by the firm.
Profit arises due to many factors such as pricing, industry competition, state
of the economy, mechanism of demand and supply, cost and output. A
healthy mix of variable and fixed factors of production can lead to an
increase in the profitability of the firm. Fixed costs are incurred by the use
of fixed factors of production such as land and machinery. In order to
maintain a tandem, it is important to continuously value the depreciation
cost of fixed cost of production. An opportunity cost must be calculated in
order to replace those factors of production which has gone thrown wear
and tear. If this is not noted then these fixed costs can cause huge
fluctuations in profit.

d. Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous

sale and purchase of securities. Hence a clear understanding of capital
market is an important function of a financial manager. When securities are
traded on stock market there involves a huge amount of risk involved.
Therefore, a financial manager understands and calculates the risk involved
in this trading of shares and debentures. It’s on the discretion of a financial
manager as to how distribute the profits. Many investors do not like the
firm to distribute the profits amongst shareholders as dividend instead
invest in the business itself to enhance growth. The practices of a financial
manager directly impact the operation in capital market.

2.5 Financial instrument

A document (such as a check, draft, bond, share, bill of exchange, futures or

options contract) that has a monetary value or represents a legally enforceable
(binding) agreement between two or more parties regarding a right to payment of
money. See also debt instrument, equity instrument, and financing instrument.

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2.6 Financial income

Revenue earned and reported on the monetary statements of an organization. In

most business situations, a company's financial income will not usually be the
same as its taxable income that is reported annually on its income tax return.

3. ECONOMICS

Economics is the study of producing goods and services and proper use of scarce
resources. Scarcity often means an individual or society has to make a choice. In
choosing one alternative over another, one activity/commodity must be foregone,
and this foregone activity/production is the opportunity cost of the choice that is
made. The choice and foregone of activity/commodity are based on the economic
theories, which consist of a set of definitions of the variables to be used in the
analysis, assumptions related to the conditions in which the theories are to apply,
and a set of testable hypotheses emanating from these definitions and
assumptions. A hypothesis is a general statement as to how variable are related
while a function is a formal, mathematical expression of the relationship.

Supply and demand is an economic model of price determination in a market.

It concludes that in a competitive market, the unit price for a particular good will
vary until it settles at a point where the quantity demanded by consumers (at
current price) will equal the quantity supplied by producers (at current price),
resulting in an economic equilibrium of price and quantity

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Economics use indices to measure macroeconomic variables, such as follow

annual rate of inflation,

the diagram below is Tanzania inflation rate at different period

national income (or output)

. National income (or output) refers to the total market value of goods and
services produced in the economy. The notion of market value incorporates both
the prices as well as the physical output of goods and services. One commonly
used measure of national income is the gross national product (GNP). GNP is the
value of all goods and services produced in the economy during a specified period;
it is the national income of that country.

and Another measure is the gross domestic product (GDP). This is an estimate of
incomes accruing from residents and generated within the country only. This
measure is sometimes referred to as gross value added. The national income divided

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by the population is the average income per person. This is known as per capita
income.

Balance of trade

is the difference between the money value of exports and imports in a given year
of trade

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factor of production

are the resources or inputs that contribute to economic activity are usually
classified into four categories: land, labor, capital and enterprise.

The objective of manufacturing is to produce saleable goods. To be saleable the

goods must function satisfactorily and this is primarily the concern of the
designer. They must further satisfy customers' needs and wants. One of the
interests of the customers is price. The price of a product is usually determined by
a combination of three factors: total costs of the product, market demand for
the product, and the competitive situation that faces the demand side. This
phenomenon is usually analysed by using a tool known as price elasticity of
demand.

4. ENGINEERING ECONOMY

Engineering economy involves formulating, estimating, and evaluating the

economic outcomes when alternatives to accomplish a defined purpose are
available. Another way to define engineering economy is as a collection of
mathematical techniques that simplify economic comparison. This subject helps
the engineer to make decisions. Engineers play a major role in capital investment
decisions based on their analysis, synthesis, and design efforts. The factors
considered in making the decision are a combination of economic and non-
economic (social, environmental, legal, political, personal, etc.) factors. Additional
factors may be intangible, such as convenience, goodwill, friendship and others.

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The economic factors can have some of the following questions:

· Which engineering projects are worthwhile? Has the mining or petroleum

engineer

shown that the mineral or oil deposit is worth developing?

· Which engineering projects should have a higher priority? Has the industrial
engineer shown which factory improvement projects should be

Funded with the available dollars?

· How should the engineering project be designed? Has the mechanical or electrical

engineer chosen the most economical motor size? Has the civil or mechanical
engineer

chosen the best thickness for insulation? Has the aeronautical engineer made

the best trade-offs between 1) lighter materials that are expensive to buy but
cheaper

to fly and 2) heavier materials that are cheap to buy and more expensive to fly?

• How much will it cost each year? (Cost estimates are needed.)
• How do we pay for it? (A financing plan is needed.)
• Are there tax advantages? (Law and tax rates are needed.)
• What is the expected rate of return? (Equations are needed.)
• What happens if we encounter more or less work/products than expected?
(Sensitivity analysis is needed.) – Sensitivity analysis is performed during
the engineering economic study to determine how the decision might
change based on varying estimates.

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The change for money over a given time period is called the time value of
money; it is the most important concept in engineering economy. Some measures
of worth are

• Present worth (PW)

• Future worth (FW)
• Annual worth (AW)
• Rate of return (ROR)
• Benefit/cost ratio (B/C)
• Capitalized cost (CC)
• Payback period
• Economic value added.

The most important of engineering economic is decision on different alternatives.

Alternatives are stand-alone options that involve a word description and best
estimates of parameters, such as first cost (including purchase price, development,
installation), useful life, estimated annual incomes and expenses, salvage value
(resale or trade-in value), an interest rate (rate of return), and possibly inflation
and income tax effects. Estimates of annual expenses are usually lumped together
and called annual operating costs (AOC) or maintenance and operation (M&O)
costs.

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5 PLANT ASSETS

Anything owned by a company or individual that has money value is known as

asset. Asset may be physical items, such as land, building, machinery, etc., or they
may represent liabilities of others, such as cash and bonds, which are owned by
government liabilities, or equities, which are company liabilities. Assets
purchased by a company that are not intended for immediate consumption,
but rather as a means of production, are known as Fixed assets. For example,
land, house, machinery for the plant of a manufacturing company. With the
passage of time, all plant assets deteriorate in service due to wear and tea. Also,
plant asset become inadequate and obsolescent if its capacity is not sufficient to
meet the demands of increased products, or if the commodity that is produces is
no longer in demand, or if a newer machine can produce a commodity of superior
quality and at a significant reduction in cost. The decreased in usefulness of the
plant is known as depreciation. Other descriptive titles of fixed assets are plant
assets, property, plant, and equipment. The initial cost of a plant asset includes all
expenditures necessary to get it in place and ready for use.

On the other hand, assets acquired for purpose of resale in the normal cause of
business cannot be characterized as plant assets regardless of their durability
or the length of time they are held. These include stock (either raw materials or
finished products) used to generate more income, and other assets, such as cash
with a bank or money owed to the company are known as current assets.

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6. INTEREST

Interest is the cost of using money. It is the rental charge for funds, just as rental
charges are made for the use of buildings and equipment. Whenever a time span is
involved, it is necessary to recognize interest as a cost of using invested funds. The
reason why interest must be considered is that the selection of one alternative
automatically commits a given amount of invested funds that could otherwise be
invested in some other opportunity. The measure of the interest is such cases are
the return forgone by rejecting the alternative use. If an amount P is invested at
time t = 0, the amount F1 accumulated 1 year at an interest rate of i percent per year
will be

F1 = P + Pi = P(1 + i) (1)

where the interest rate is expressed in decimal form. At the end of the second year,
the amount accumulated F2 is the amount after year 1 plus the interest from the
end of year 1 to the end of year 2 on the entire F1. Thus

F2 = F1 + F1 i = P(1 + i) 2 (2)

By mathematical induction the formula can be generalized for n years to

F = P(1 + i) n (3)

Reverse the situations to determine the P value for a stated amount F that occurs n
periods in the future, simply solve Equation 3 for P.

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P = F( ) (4)
(1 + i ) n

When accumulating, we advance or roll forward in time. The difference between

our original amount and our accumulated amount is called compound interest.
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When discounting, we retreat or roll back in time. The difference between the
future amount and the present value is called compound interests or compound
discount. Thus

Compound interest = P[(1 + i) n − 1] (5)

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Compound discount = F [1 − ] (6)
(1 + i ) n

A series of equal payments (receipts) to be paid (or received) at the end of

successive periods of equal length is known as an (ordinary) annuity.

𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 (𝑝) 𝑖

Annuity = (7)
1−(1+𝑖)−𝑛

Table 1: Compounded Amount of shs.1.00 (The Future Value of shs.1.00)

F = P(1 + i) n . In this table P = shs.1.00.

Periods
(n) i = 4% 6% 8% 10% 14% 20%

1 F=1.040 1.060 1.080 1.100 1.140 1.200

2 1.082 1.124 1.166 1.210 1.300 1.440

3 1.125 1.191 1.260 1.331 1.482 1.728

4 1.170 1.262 1.360 1.464 1.689 2.074

5 1.217 1.338 1.469 1.611 1.925 2.488

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 F
Table 2: Present value of shs.1.00. P = . In this table F = shs.1.00
(1 + i ) n

i=
Periods 4
(n) % 6% 8% 10% 14% 20%

1 0.962 0.943 0.926 0.909 0.877 0.833

2 0.925 0.890 0.857 0.826 0.769 0.694

3 0.889 0.840 0.794 0.751 0.675 0.579

4 0.855 0.792 0.735 0.683 0.592 0.482

5 0.822 0.747 0.681 0.621 0.519 0.402

Table 3: Compound Amount of Annuity of shs.1.00 in Arrears. (Future Value of

(1 + i ) n − 1
Annuity) Fn =
i

Period
(n) i= 4% 6% 8% 10% 14% 20%

1 1.000 1.000 1.000 1.000 1.000 1.000

2 2.040 2.060 2.080 2.100 2.140 2.200

3 3.122 3.184 3.246 3.310 3.440 3.640

4 4.246 4.375 4.506 4.641 4.921 5.368

5 5.416 5.637 5.867 6.105 6.610 7.442

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 1 1 
Table 4: Prevent Value of Annuity of shs. 1.00 in Arrears. Pn = 1 − 
i (1 + i ) n
 

Periods
(n) i= 4% 6% 8% 10% 14% 20%

1 0.962 0.943 0.926 0.909 0.877 0.833

2 1.886 1.833 1.783 1.736 1.647 1.528

3 2.775 2.673 2.577 2.487 2.322 2.106

4 3.630 3.465 3.312 3.170 2.914 2.589

5 4.452 4.212 3.993 3.791 3.433 2.991

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 ASSIGNMENT 01
GROUP OF NOT MORE THAN 5 PEOPLE
TO BE SUBMITTED ON MONDAY 03/DECEMBER/2018
NOTE (COPY AND PASTE IS SUBJECTED TO PENALTY OF -10
1.By using excel sheet program develop a sheet with equations where the value will
be plugged and the results will be shown in the sheet ( use 5 in put data as an
example) (SOFT COPY SUBMISSION)
DATA INPUT
• Interest
• Present value
• Period
RESULTS FROM THE SHEET
• Ordinary
• Future value
• Compound interest
• Compound discount
2. by using the knowledge you have about finance as how it has been defined and
engineering economy evaluate and derive conclusion on the business between
public transport investment (bus) and real estate (house) when you have secured
a loan of 300 million TZ with 8% interest per year and explain your selection
by considering the following factors) (HARD COPY SUBMISSION IN
REPORT FORM)
• Present worth (PW)
• Future worth (FW)
• Annual worth (AW)
• Rate of return (ROR)
• Benefit/cost ratio (B/C)
• Capitalized cost (CC)
• Payback period
• Economic value added
• Risk on investment
• Value for money
• And other factors as economist engineer
(note all information delivered to conclusion must be vivid and not just
subjective assumptions include all preliminary regulations requirements
and source of cost and any data

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 7. ACCOUNTING AND BOOKKEEPING
Accounting is concerned with processes of recording, sorting, and summarizing
data related to business transactions and events. Such data are to a large
extent of a financial nature and are frequently stated in monetary terms.
Accounting is also concerned with reporting and interpreting the data. There
is some confusion over the distinction between “bookkeeping” and “accounting.”
This is partly because the two are related. Bookkeeping is the recording of
business data in a prescribed manner; while Account is primarily concerned
with the design of the system of records, the preparation of reports based on
the recorded data, and the interpretation of the reports. Generally, all
business transactions of an economic unit must first be recorded, followed by
analysis and summarization, and finally by periodic reporting. Properties and
services purchased by a business are recorded in accordance with the cost
principle, which requires that the monetary record be in terms of cost. The
occurrence of an event or of a condition that must be recorded is known as business
transaction. A business could be a sole proprietorship is owned entirely by one
individual. But a business could be a partnership is owned by two or more
individuals in accordance with a contractual arrangement among them; and could
be a corporation if is a separate legal entity, organised in accordance with
government rules and regulations in which ownership is divided into shares of
stock. A company is said to be limited if its arrangement whereby the liability
of the owners of the company, the shareholders, is limited to the amount they
have subscribed for shares plus any uncalled capital on shares in issue. The
liability of a limited company itself, however, is not limited. It is liable for every
penny it owes and share it is unable to meet its commitments, it is put into
liquidation and its assets divided up amount creditors, generally on a pro rate
(calculated according to the individual position) basis.
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Definition of 'Free Reserves'
A measurement of a bank's reserves that is equal to the difference between
borrowed reserves and excess reserves. This is the amount which the bank has
available to lend to clients. A bank is required by government rule to hold a
specific amount of reserves at any given time. The excess reserves are calculated by
subtracting the required reserves from the total reserves it holds.

In business, economics or investment, market liquidity is an asset's ability to be

sold without causing a significant movement in the price and with minimum loss
of value. Money, or cash, is the most liquid asset, and can be used immediately to
perform economic actions like buying, selling, or paying debt, meeting immediate
wants and needs.[1] However, currencies, even major currencies, can suffer loss of
market liquidity in large liquidation events.

Definition: Liquidity is the amount of capital that is available for investment and
spending. Most of the capital is credit rather than cash. That's because the large
financial institutions that do most investments prefer using borrowed money.

The properties owned by a business enterprise are referred to as assets and the
right or claims to the properties are referred to as equities. The relationship
between the two may be stated in the form of an equation, as follows:
Assets = Equities
The equities of creditors represent debits or the business and are called
liabilities. The equity of the owners is called capital, or owner’s equity.
Expansion of the equation to give recognition to the two basic types of equities
yields the following, which is known as the accounting equation:

Assets = Liabilities + Capital

The principal accounting statements of a sole proprietorship are the balance sheet
and the income statement. They are usually accompanied by a less important, but
useful, statement called capital statement. The nature of the date presented in
each statement, in general terms, is as follows:

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Balance sheet is a list of the assets, liabilities, and capital of a business entity as
of a specific date, usually at the close of the last day of a moth or a year. The
definitions of these terms are as follows:
• Assets is any physical thing (tangible) or right (intangible) that has a
money value;
• Liabilities are debts owed to outsiders (creditors); and
• Capital is the term applied to the owner’s equity in the business.

Income statement is a summary of the revenue and the expenses of a business

entity for a specific period, such as a moth or a year. Revenue is the gross increase
in capital attributable to business activities.

Capital statement is a summary of the changes in capital of a business entity that

have occurred during a specific period of time, such as a month or a year.

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Example
Jaribu and Co.
Income Statement
For Month Ending December 31, 2012

Shs. Shs.
Sales 390,000
Operating expenses:
Wages expense s112,500
Supplies expense 60,000
Depreciation expense 35,000
Rent expense 10,000
Utilities expense 5,000
Miscellaneous expense 7,500
Total operating expenses 230,000
#1
Net income 160,000

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Jaribu and Co.
Retained Earnings Statement
For Month Ending December 31, 2012

Shs.
#1
Net income for the month 160,000
Less dividends 100,000
#2
Retained earnings, December 31, 2005 60,000

Jaribu and Co.

Capital Statement
For Month Ending December 31, 2012
Shs. Shs.
Capital, December 1, 2005 1,800,000
Net income for the month 160,000
Less withdrawals 100,000
#2
Increase in capital 60,000
Capital, December 31, 2005 1,860,000

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Jaribu and Co.
Balance Sheet
For Month Ending December 31, 2012
Shs. Shs.
Assets
Cash 665,000
Supplies 25,000
Equipment 1,250,000
Less accumulated depreciation 35,000 1,215,000
Total assets 1,905,000
Liabilities
Accounts payable 45,000
Capital
Capital stock 1,800,000
#2
Retained earnings 60,000
Total capital 1,860,000
Total liabilities and capital 1,905,000

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