Notre Dame University

Department of Civil Engineering

MNGT 3000
ENGINEERING MANAGEMENT REPORTING

Group XII MNGT 3000 COED

2021
 MNGT 3000 – ENGINEERING MANAGEMENT REPORTING

TABLE OF CONTENTS

XII MANAGING THE FINANCE FUNCTION

XII.1 What the Finance Function Is

XII.2 The Determination of Fund Requirements

XII.3 Sources of Funds

XII.4 The Best Source of Financing

XII.5 The Firm’s Financial Health

XII.6 Indicators of Financial Health

XII.7 Risk Management and Insurance

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XII.1 What the Finance Function Is

The finance function is an important management responsibility that deals with

the “procurement and administration of funds with the view of achieving the objective
of business”. If the engineer manager is running the firm as a whole , he must be
concerned with the determination of the amount of funds required, when they are
needed, how to procedure them, and how to effectively and efficiently use them.

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.

The finance function is one of the three basic management functions. The other
two are production and marketing.

Determination
1. Short-term
of fund
2. Long-term
requirement

Procurement 1. Short-term
of funds 2. Long-term

1. Short-term
Effective and 2. Long-term
efficient use of
funds
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XII.2 The Determination of Fund Requirements

Any organization, including the engineering firm, will need funds for the
following specific requirement:

1. to finance daily operations

2. to finance the firm’s credit services
3. to finance the purchase of inventory
4. to finance the purchase of major assets

FINANCING DAILY OPERATION

The day to day operation of the engineering firm will require funds to take care
of expenses 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, stationary and printing postage, etc.
6. administrative expenses like those for auditing, legal, services, etc.

FINANCING THE FIRM’S CREDIT SERVICES

It is often times unavoidable for firms to extend credit to customers. If the
engineering firm manufactures products, sales terms vary from cash to 90 days
credit extensions to customers. Construction firms will have to finance the
construction of government projects that will be paid many months later.

FINANCING 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. Many firms cannot cope with delays in the availability of the
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required material inputs in the production process, so these must be kept ready
whenever required.

FINANCING THE PURCHASE OF MAJOR ASSET

Companies at times, need to purchase major assets. When top management
decides on expansion, there will be a need to make investment in capital assets like
hand, plant, and equipment

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

XII.3 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:

1. Cash sales. Cash is derived when the firm sells its

products or services
2. Collection of Accounts Receivable. Some engineering
firms extend credit to customers. When these are
settled, cash is made available
3. Loans and credits. When other sources of financing are
not enough, the firm will have to resort to borrowing
4. Sale of assets. Cash is sometimes obtained from the sale
of the company’s assets
5. Ownership contribution. When cash is not enough, the
firm may tap its owners to provide more money
6. Advances from customers. Sometimes, customers are
required to pay cash advances on orders made. This helps
the firm in financing its production activities
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SHORT-TERM SOURCES OF FUNDS

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.

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. Thus, 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, they make
it available at less cost.
3. short-term financing offers flexibility to the borrower.
After the borrower has settled his short-term debt, he
may consider other means of financing, if he still
requires it. Long-term financing, in contrast,
eliminates this option. He is stuck with the long-term
funds even if he no longer requires it.

Disadvantages of short-term credits. Short-term financing has also some

disadvantage. They are as follows:

1. short-term credits mature more frequently. This may

place the engineering firm in a tight position more
often than necessary. When the frequently of the firm’s
cash inflows are more than twelve months apart, the firm
could be in serious trouble meeting its short-term
2. short-term debts may, at times, be more costly than
long-term debts. When short term expenditures, the
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frequent renewals, adjustment of terms, and shopping for

new sources may prove to be more costly

Supplies of short-term funds. Short-term financing is provided by the

following:

1. trade creditors- refer to suppliers extending credit to

a buyer for use in manufacturing, processing or
reselling goods for profit
2. commercial banks- are institutions which individuals or
firms may tap as source of short-term financing
3. commercial paper houses- are those that help business
firms in borrowing funds from the money market
4. finance companies- are financial institutions that
finance inventory and equipment of almost all types and
sizes of business firms
5. factors- are institutions that buy the accounts
receivable of firms, assuming complete accounting and
collection responsibilities
6. insurance companies- are also possible sources of
short-term funds

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.
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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

The advantages of term loans as a long-term source of funds are as follows:

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

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

Bonds. 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.
Common stocks. The third source of long-term funds consists of the issuance
of common stock.
Retained earnings. Retained earnings refer to “corporate earnings not paid
out as dividends. This simply means that whatever earning that are due to the stock
holders of a corporation are reinvested.

XII.4 The Best Source of Financing

As there are various fund sources, the engineer manager, or whoever is in

charge, must determine which source is the best available for the firm.

To determine the best source, Schall and Haley recommends that the
following factors must be considered.

1. flexibility- some fund sources impose certain

restrictions on the activities of the barrowers
2. risk- 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
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is chosen.
3. income- the various sources of funds, when availed of,
will have their own individual effects in the net income
of the engineering firm
4. control- when new owners are taken in because of the
need for additional capital, the current group of owners
may lose control of the firm
5. timing- financing 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
6. other factors like collateral values, flotation cost,
speed, and exposure.
- collateral values: are there assets available as
collateral?
- Flotation cost: how much will it cost to issue bonds
or stocks?
- speed: how fast can the funds required be raised?
- Exposure: to what extent will the firm be exposed to
other parties

XII.5 The Firm’s Financial Health

In general, the objectives of engineering firms are as follows:

1. to make profits for the owners:

2. to satisfy creditors with the repayment of loans plus
interest
3. to maintain the viability of the firm so that customers
will be assured of a continuous supply of products or,
employees will be assured of employment, suppliers will
be assured of a market, etc.
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XII.6 Indicators of Financial Health

The financial health of an engineering firm may be determined with the

use of three basic financial statement. These are as follows

1. Balance sheet- also called statement of financial position

2. income statement- also called statement of operations;
3. statement of changes in financial position.

To be able to determine the financial health of a firm, the appropriate

financial analysis must be undertaken.

XII.7 Risk Management and Insurance

The engineer manager, especially those at the top level, is entrusted with
the function of making profits for the company. This will happen if losses brought by
improper management of risk are avoided.

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 a daily basis the destruction of life and property. Companies
that could not cope with losses are forced to shut down, according to reports.

RISK DEFINED
Risk refers to the uncertainly concerning loss or injury. He engineering firm
is faced with a long list of exposure to risks, some of which are as follows:

1. fire
2. theft
3. floods
4. accidents
5. nonpayment of bills by customers (bed debts)
6. disability and death
7. damage claim from other parties
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Types of risk
Risks may be classified as either pure or speculative. Pure risk is one in
which “there is only a chance of loss”. This means that there is no way of making
gains with pure risks. An example of pure risk is the exposure to loss of the
company’s motor car due to theft. Pure risks are insurable and may be covered by
insurance.

What is 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

There are various methods of dealing with risks. they are as follows.
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

A person who wants to avoid the risk of losing a property like a house can
do so 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 this case, other methods of handling risk must be
considered.
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Group XII Members:

• Alibsar Cusain
• Khalil Ibrahim
• Jibreen Taug