BUSINESS FUNCTIONS NOTES

PRODUCTION /OPERATION FUNCTION

PRODUCTION 

Definition:

Production function is a process of designing, operating and controlling productive system

capable of transforming physical resources and human resources into the needed goods and
services.

 Productive system generates intangible services and tangible goods.

 Production core organisational function
 Production function commands the flow of resources through the org.
 Community depends heavily on the output of productive org.

Production system/process

Input transformation process output

(resources) (Productive activities) (good & services)

 Resource acquiring
 Production methods
 Product design
 Production planning
 Scheduling & control
 Purchasing & material mgt
 Inventory control
 Workflow layout

Resource acquiring

Securing or acquiring all the necessary factors of production to input into the production system
e.g. money, machines, material, manpower or time

Production methods
The processes and methods used to transform tangible inputs (raw materials, semi-finished
goods, subassemblies) and intangible inputs (ideas, information, knowledge) into goods or
services.
Resources are used in this process to create an output that is suitable for use or has exchange
value.
There are four main types of industrial production methods:
  One-off production is when only one product is made at a time. Products may be made
by hand or a combination of hand and machine methods.
 Batch production is when a small quantity of identical products are made. Batch
production may also be labour intensive, but jigs and templates are used to aid
production. Batches of the product can be made as often as required. The machines can
be easily changed to produce a batch of a different product.
 Mass production is when hundreds of identical products are made, usually on a
production line. Mass production often involves the assembly of a number of sub-
assemblies of individual components. There is usually some automation of tasks (eg by
using Computer Numerical Control machines) and this enables a smaller number of
workers to output more products.
 Continuous flow production is when many thousands of identical products are made.
The difference between this and mass production is that the production line is kept
running 24 hours a day, seven days a week to maximise production and eliminate the
extra costs of starting and stopping the production process. The process is highly
automated and few workers are required.

Product design

This is the process of creating a set of product specifications appropriate to the demands of the
situation. Good designed products increases but not guarantee the probability of survival.

 However, a poorly designed product on the other hand virtually guarantees failure.
 Satisfied customer tells 3 Vs 11 by dissatisfied one. Costly product recalls, product
liability lawsuits.
 Cost of producing a product is pre-determined during the design phase, and today it has
been eased by innovations in Computer Aided Designs (CAD) programmes. Parallel
design (concurrent engineering) cross-functional team.
 These programmes can display a product in 3 dimensions e.g. can create a design of a
product without even building a prototype such that by the final product, they already
know how it will be manufactured, how long it will take to assemble, and cost.

Computer-aided design (CAD) is now common in industry. ICT is most often used in mass
production, as computer control makes it possible to produce many identical items very quickly.
But ICT is also useful in small batch and even one-off work, as computer control enables
complicated shapes to be produced more accurately than by hand.

ICT in design
ICT can help with designing products in many ways:
 Drawings, graphics and diagrams can be produced and edited using graphics or design
software.
 Writing and drawings can be combined using desk-top publishing (DTP) software.
 Pictures of existing products can be scanned and used in graphics, photo-editing or DTP
software.
 Database packages can be used to record and analyse survey data.
  Spreadsheet software can be used to make Gantt or other planning charts, to produce
graphs and charts, and to help with costing projects.
ICT in production
ICT can help with the making of products in the following ways:
 Shapes printed onto card can be used for templates.
 Text printed out can be glued onto sheet material and cut out.
 Machines for cutting card and self-adhesive vinyl sheet can be used to cut letters or
shapes. Complicated shapes can be cut more easily by machine than by hand.
 Computer-controlled lathes can make a number of identical turned parts.
 Computer-controlled milling machines can cut out shapes more easily than by hand,
especially recesses in materials. Complicated shapes can be cut more easily than by hand.
 Parts which have fine detail, or need to have accurately fitting parts, can be made more
accurately than by hand or manual machine methods

Production planning

This is a process of formulating a resource transformation system that will effectively &
efficiently meet the forecasted demand for goods and services.

 Productive resources – facilities & space, equipments, skilled & unskilled employees,
purchased parts, & raw materials. Scheduling & control are critical parts of the
production planning
 Production planning guides the productive process which in turn affects future planning.

Production schedule

This is an authoritative statement of how many end items are to be produced & when.

 The coordination of productive activities becomes both more difficult and more
important as product lines & facilities are added.

Workflow layout

This is a process of determining the physical arrangements of the productive system.

 Because a transformation of resources into finished goods involve a system, every part of
it is important including physical movements of work through the production cycle.
 People, machines & work situations can be scattered about haphazardly or can be
arranged in a logical, orderly and cost-effective manner.

Advantages

 Minimises investment in equipments

 Minimises overall production time
  Utilises existing space effectively
 Provide for employees’ convenience, safety & comfort
 Minimises material handling costs
 Maintain flexibility of arrangements & operation

Purchasing and Material Management

Purchasing refer to the procurement of raw materials, components, equipment and services
needed to accomplish organisational objectives.

There should be an established and adequately staff purchasing/material management department

(PDU).

 Materials purchases account for more than 50% of a product’s wholesale price e.g. car
parts purchased outside supply. Therefore, when a firm decides to buy rather than make a
portion of its products, purchasing become an important link in the productive system.
 Plus wide range of services like insurance, consultations etc.
 Purchasing process- must consider vendor selection- agree who you buy from which is
equally as important as what you buy

Selection should go under a systematic analysis, and each vendor must be screened on the basis
of;

 Price- shopping around & negotiating for the lowest possible price is vital for selecting.
 Quality- substandard & shoddy raw materials & subcomponents mean substandard final
products (garbage-in-garbage out). However, challenge is to look for best possible
product at lowest price. Link product design & purchasing – product design
specifications are the basis for purchasing specification.
 Reliability – price & quality are nothing if the vendor can’t serve the buyers needs
reliably. Checking vendor’s track record with other buyers is a good paying practice.
Because vendors may fail to meet buyers needs for some reasons like inadequate
financing, raw material shortages, industrial unrest, and unreliable transport
 After sales service – vendors follow up is an important criterion in regard to purchase of
complex capital equipments
 Credit – does the vendor demand immediate payments or are liberal credit terms
available. Negotiate favourable credit terms & also take advantage of cash discounts.

Inventory control

Defined as a process of establishing & maintaining appropriate levels of reserve stocks of goods.

 Regard to raw materials, components & supplies, purchasing/material management &

inventory go together. Not used at arrival need to be kept on hand for varying periods.
 Types of inventory; i) materials and purchased components, ii) work in process, iii)
supplies, and v) finished goods.
Managing an inventory cycle.

 Process focus on/amounts to deciding how much to order & when

 Basic cycle involve; safety stock, reorder point & lead time

Just-in-time production (JIT)

This is a process philosophy focusing attention on eliminating waste by purchasing and

manufacturing just enough of right items just in time (referred to as ‘hand-to-month
approach)

 Purchase & produce goods in smaller but high-quality goods

 Design more efficient workflows by eliminating costly bottlenecks

HUMAN RESOURCE MGT FUNCTION

Definition

HRM is a function within an org. that focuses on recruitment of, management of, and providing
direction for the people work in the org. or

HRM refers to that part of an organization’s activities designed to attract, train, develop and
maintain an effective workforce.

HRM is part of the management process that specialized in the management of people through
the following functions;

 Hiring
 Compensation or rewards
 Performance management
 Organizational dev’t
 Health and safety
 Wellbeing and benefits
 Employee motivation
 Communication
 Administration
 Training

RECRUITMENT AND SELECTION

After the manpower analysis, and the identification of workforce requirements in an

organisation, the process to search and hire manpower begins i.e. recruitment and selection.
  The task of securing the appropriate personnel to fill vacant positions is an important are
of HRM and orgs. can’t excel without adequate quality people.
 The goal of recruitment and selection is to look or find the best person for every position.
RECRUITMENT

Defn.

 It is a process of finding and attracting sufficient and suitable potential employees to

apply for available vacancies in the organisation.
 Recruitment can be defined as a process of finding and attracting prospective employees
(both within and outside) for positions or group of postion in order to be able to make the
best selection.
Approaches to recruitment

There are three approaches to recruitment i.e. selection, development and ‘sink & swim’.

 Selection: seek to get fully trained personnel capable of starting work at once, and is
common with orgs. of fewer or limited promotion opportunities e.g. law firms, medical,
construction.
 Development: this approach involves creating conditions which equip the employees with
the necessary skills/knowledge and facilities to empower them to do job effectively.
 “Sink & Swim”: under this, you hire more people than you need, observe them at work
and those who prove competent are retain and incompetent ones are dropped e.g. in
industries specialized skills like electronics
Recruitment process

 Identify the vacancy in the org. – the need to fill it

 Advertise either internally/externally – externally link between org. (vacancy) and the
prospective employees.
Sources of employees

Sources are both internal and external

Internally – most organisations have a policy that when an opportunity arises, first priority
should be given to staffs – transfers, promotions but this encourages mediocre performance, no
new blood only dead woods

Externally

 Colleges and universities

 Employment bureaus for unskilled or semi-skilled labour e.g. Difra, Hozana
 Employment agents or labour exchange firms
 Advertisements in the media
 Referrals from existing staffs
 Placement and consultant firms e.g. DAMA, PILA, UMI,
 Professional journals (ads)
  Applicants at the gate
 Executive search – head hunt especially for skilled labour
SELECTION

Defn.

 Selection is a process of identifying and filling vacant positions in the organisation with
most suitable applicant. Or
 It’s a task of seeking the competent and the best to take up the job.
 Organisations seek to get fully trained personnel capable of starting work right away.
 Selection always takes two dimensions i.e. fitting jobs to people and fitting people to
jobs.
 Fitting jobs to people: design jobs to fit a particular category of persons e.g. affirmative
action for disadvantaged ones/
 Fitting people to jobs: existing jobs require competent & qualified people to fill them.
Selection procedure

Selection process goes through a number of steps from vacancy identification up to probation.

1. Vacancy identification
2. Advertisement – internally/externally
3. Application forms/letters (also a technique of selection)
4. Shortlisting – getting few who met basic requirements for further selection, and also
come up with a manageable numbers.
5. Selection of the best – engage in selection process through various techniques
6. Feedback – letters of offer or regret
7. Induction/orientation – introduce accepted applicant to the job context & content
8. Probation – assess suitability of the candidate for permanent appointment but once found
incompetent terminate or reassign another job.
Techniques

1. Application forms/letters – provides most relevant data about the applicant, and other are
accompanied by CVs
2. Interviewing – this is the dominant method used though not the best. It involves an
interaction or meeting where candidates are asked questions either orally or written on
themselves and job.
3. Psychometric test
 Performance test (mental ability or achievement test)
 Personality questionnaires (measure of personality)
 Attainment test (knowledge skills one has acquired)
 General intelligence & aptitude tests (individual capacity to learn or perform)
 Special aptitude (concentrates on one type of ability e.g. mechanical)
 Trainability test (tests specific job related tasks one trained on)
 Personality test (test on extrovert/introverts or active/passive)
 Physical/health test (physical fitness of the applicant)
 4. Presentation and demonstration – candidates their skills to panel of observe to show their
managerial or practical skills e.g. exercise & role play
5. Group selection method-interaction between candidates in groups in order to evaluate
leadership, team work or interpersonal skills
6. References – gives additional data to confirm basic factual details given by the candidate

HUMAN RESOURCE PLANNING (HRP)

HRP is a process of analysing organisation’s staffing needs and how to satisfy these needs
overtime. Or it’s a process through which orgs. Ensure they have the right numbers and quality
of people in positions available to them at the time they want them who are effectively and
efficiently capable of accomplishing tasks assigned to them.
 It identifies areas where shortage/excess of MP is likely to occur in the org. in future
 HRP is about forecasting labour demand and labour supply and develop plans to meet
any identified imbalances.
 Identifies where there is inefficient use of MP in the org.
 Therefore, HRP deals with forecasting the nos we need to hire, train, promote, maintain
and retire within a given period of time as per the organisation’s MP requirements.
Usefulness of HRP
HR contributes alot to the orgs’ plans (crucial F.O.P) e.g. you need humans to accomplish tasks
to meet orgs’ objectives.
 Determines the recruitment levels – avoiding expensive and unsatisfactory panic
measures when shortages occurs like during loss of business
 Helps to anticipate redundancies and if possible prevent it and avoid its attendant
financial and human costs.
 Helps to monitor the ratio of MP costs in order to determine the best use of financial
resources in the overall org.
 It allows the basis for training and development programmes geared towards orgs’
objective and also meet company succession plan
 Helps to identify future worker’s needs in order to motivate them and retain them e.g.
recreation facilities, canteens and other welfare facilities.
 Allows the right balance between labour supply and demand at given time.
Retirement

Definition: This refers to the time when a worker reaches the end of his/her working life. It’s the
age at which the org. decides to retire its staffs varies, but in most cases in Africa is between 55-
60 years of age.
 Some orgs. adopt a policy of flexible retirement for example early retirement or
voluntary retirement.
However, most organisations prefer a fixed retirement because it well fits with HRP
programmes and allow succession plans to be utilised.
Sometimes, employees may be required to stay on after their retirement as longer as they
are still capable and needed by the org. when are now put on contract terms.
Also, these days voluntary retirement is seen as a means to get rid of unpopular
employees
Schemes to cater for retirements

There are many reasons why orgs. try to institute pension schemes.
To increase the economic security of employees both in short-term (assistance to meet
immediate problems whilst at work) and long-term (cater for employees’ well being after
employment).
To give employees confidence in the future both when still in active employment and
after he retires, and pension contribution makes this happen
Retired people still have many years to live and contribute, so they need to be supported
and in case this is not done, they may become destitute and dependants.
To improve the orgs’ image as a good employer who is committed to workers wellbeing.
To enable retiredees enjoy financial security in their later years.
Pension plans: covers both defined pension and defined contribution pension schemes.

Defined benefit pension – contains a formula for determining retirement package such
that actual benefits are defined & recorded before e.g. % pay of last 5 years annual pay.
For example with civil servants provided by the Pension Act cap 281, Pension Act cap 11
for teachers or Pension Act cap 27 for urban authorities.
Defined contribution pension – defines what contribution the employer would make to a
retirement/savings fund set up for workers e.g. 10% of employee’s monthly pay. This
covers only the period of contribution

Non-contributory scheme for contract workers who get what is called gratuity calculated
on a certain percentage of the annual salary like 25% for every month, and payable at end
of the contract.

Redundancy

This is a situation in which management decides that employee/employees are a surplus to the
requirement of a particular occupation and can’t be offered alternative work/activity. Its a big
problem especially to the employees and their families who are adversely affected.
Causes of redundancy

When an org. ceased to carry on the business in which the employee was engaged.
The organisation ceased to operate a business at a place which the employee was
employed.
No longer has a requirement for that particular work that the employee was employed to
do e.g. due to technological replacement
For cost cutting exercise-in a bid to turn around or rejuvenate the business
How to avoid redundancy
Limitation on overtime that could be instead used to pay salaries of the would be
retrenched.
Dismissal of part-time or short time contract staffs
Restrictions on recruitment or freeze recruitments like in case of Public service done after
some spell of time.
Training and retraining programmes to equip them with the appropriate KSAs
Retirement of staffs of the retirement age to give way for the would be redundancees.

Encourage early retirement especially those nearing the statutory age for retirement

Motivation

Motivation is the desire, effort or drive to have ones needs or goals satisfied.

It’s assumed that urges, aspirations, drives and needs of human beings direct or control or cause
human behaviour. Also, if needs are not satisfied, there would be a growing tendency towards
dissatisfaction and frustration.

In organizations, the manager’s role is to get things done through employees and employees to
be more productive and creative must be motivated. Therefore, they will do what they want to do
or otherwise motivated to do so either by themselves (intrinsic motivation) or through external
stimulus (extrinsic motivation).

Intrinsic motivation—the desire to do something based on the enjoyment or personal

fulfillment that comes from completing a task.

Extrinsic motivation—desire that’s created by external factors, such as the promise of money

Training
 Training is a series of very specific, structured activities that are related to achievement
of clearly stated performance objectives that are typically related to doing the job.
Its purpose in workplace situation is to develop the abilities of individuals and satisfy the current
and future needs of the org. meets current requirements of the job & individual

Examples; training for selling skills, to operate a specific production system/process/machine.

Development
 This is a learning process where people acquire new horizons, technologies or view
points.
 Development can be seen also as a learning activity, which is directed towards adoption
of KSA for application to the future role and is connected more with
 T&D functions help organizations to develop their resources in terms of skills, basic
aptitudes and leading continued person growth as well as acquiring technical, managerial
skills and knowledge, abilities, and behavioural (attitudes).
 T&D as learning processes in the organisation apply both to the new employees
(induction training) and old employees (training to adjust to changing job requirements).
Objectives of training/purpose

 To enhance the existing skills, knowledge and performance capabilities of the

employees.
 Help to keep abreast of development in technology and managerial fields.
 Build a more efficient, effective and highly motivated team, which enhances the
company’s competitiveness and improve employee morale.
 Help to develop capabilities and competencies to assume increased responsibility
and promote skills in supervisory, interpersonal & team building
 Promote individual development and create conditions for high level of work
enjoyment & desired attitudinal changes
 Identify, assimilate & develop value systems and behaviour, practices and
commitment to excellence in all endeavours in the org.
 Ensure T&D becomes an important strategy for organizational development and
significant management tool for change
 Help in the HRP process ensuring the availability of adequate HRs for meeting
organizational requirements.
 Improve the quality and quantity of output to lower the costs of wastes, equipment
maintenance and accidents
 Induct the new employees or recruits into the org.
 Fill the performance gap identified during performance reviews
 Harmonize career interests of individuals and bringing them with goals &
objectives of the org.
 To shorten the learning time for employees who are starting new jobs so that they
become competent as quickly as possible
Healthy and safety

Healthy and safety concept focuses on the relationship of health to work and working
environment. It is concerned with the assessment, prevention and control of mechanical,
physical, biological, chemical, and psychological hazards in order to eliminate occupational
accidents, disabilities and death of workers at workplace.
Health and safety plans are about preventing people from being harmed at work or becoming ill
by taking the right precautions and providing a satisfactory working environment.

 Poor health and safety leads to illness and accidents and significant costs for your
business. They also harm the environment and hurt your profits too.
 On the contrary, an effective health, safety and environmental practices pay for
themselves. They improve your business’s reputation with customers, the local
community and your own employees.
 Therefore, all businesses must ensure their workplace – whether it is a factory, office or
shop meets minimum health and safety standards.

MARKETING FUNCTION
Marketing, than any other business function, deals with customers. Its about managing
profitable customer relationships – attracting new customers by promising superior value and to
keep & grow current customers by delivering satisfaction.
Marketers need to understand customer needs & wants, and marketplace within which it
operates, and considers 5 core concepts;
 Needs, wants and demand
 Market offers – products, services & experiences
 Value and satisfaction – expectations
 Exchange and relationships – obtain something in return for something
 Markets – set of actual & potential buyers
Therefore, marketing means managing markets to bring about profitable customer relationship.
 Sellers must search for buyers, identify their needs, design good marking offers, set
prices for them, store & distribute/deliver them. Consists therefore, activities like
research and dev’t, product plan & dev’t, selling, standardization and branding,
packaging, transportation, pricing, communication or storage.
Marketing management
It’s the analysis, planning, implementing and control of programmes designed to create, build
and maintain beneficial exchanges which target buyers for the purpose of achieving
organizational goals.
Marketing management orientation
There are 5 concepts under which firms design & carry out marketing strategies;
 Production – holds that consumers will favour the products that are available and highly
affordable. Focus on production improvement & distribution efficiency. Demand must
exceed supply
 Product – assumes that customers will favour products that offer the most in quality,
performance and innovative features. Focus on continous improvement
  Selling – holds that consumers will not buy enough of the firm’s products unless it
undertakes a large scale selling & promotion efforts. Sell what they make not what the
market wants.
 Marketing – achieving organizational goals depends on knowing the needs and wants of
the target markets & delivering the desired satisfaction better than competitors.
Customer-focused. Focus not to find the right customers for the firms’ products but to
find products for the customers
 Societal marketing – there has been a conflict between short-term wants and long-run
consumer welfare. This hold therefore, that marketing strategy should deliver value to
consumers in a way that maintains both the customer and society’s wellbeing. Focus o co.
profits-consumer wants-society’s interests.
Marketing process
2 3 4
1
Understand Design a Construct a Build
marketplace customer mktg prog. profitable
driven mktg that deliver r/hips &
& customer
strategy value create
needs & wants
customer
delight

-R&D
-select -prodt/svc
- Customer & -CRM
customer to design
mrktplace
serve ST -partnership
-pricing
- manage inf. r/ships
positioning
& customer -Distribn
P

Ma
rketing strategy and mix
 This is a marketing option by which the firm hopes to achieve profitable relationships.
Through STP, the firm decides which customers to serve and how. After identifying the
total market, the co. divides it into smaller segments, select the most promising segment
& focus on serving and satisfying customers of the segment.
 Guided by the marketing strategy, the firm designs a marketing mix made up of 4 Ps
 To get the best marketing strategy & mix, the firm engages in marketing analysis,
planning, implementation and control (managing the market effort)

Customer-oriented marketing strategy

  To succeed in a competitive marketplace, cos. Must be customer-centred, win customers,
keep them, grow them by delivering greater value – share their needs and wants
 Companies can’t profitably serve all consumers in a given marketplace, at least not all
consumers in the same way. There are so many different kinds of consumers with too
many different kinds of needs.
 Divide the total market into segments, choose best segment & design strategies to
profitably serve the chosen segment i.e. market segmentation, target marketing & market
positioning

Market segmentation
This is a process of dividing a market into distinct groups of buyers who have distinct needs,
characteristics or behavour, and who might require separate products or marketing progs.
 Grouped/served in various ways based on geographic, demographic, psychographic and
behaviour factors.
 A market segment consists of consumers who respond in a similar way to a given set of
marketing efforts.

Target marketing
After segmentation, co. can enter one or many segments of a given market. Target marketing is a
process of evaluating each market segment’s attractiveness and selecting one or more segments
to enter.
 Target the best – profitable & sustainable
 Limited resources lead to serve one segment – special segment “market niche”. Nichers
specialized in serving market segments that major competitors ignore/overlook.
Marketing positioning
Arranging for a product to occupy a clear, distinctive & desirable place relative to competitors’
products in the minds of target consumers.
 After market enter decision, co. must decide what positions it wants to occupy in those
segements. Product position is the place the product occupies relative to competitors in
consumers’ mind
 Unique sales propositions for their products

Developing a marketing mix

This is a set of controllable, tactical marketing tools that the firms blends to produce the response
it wants in the target market. Covers everything to influence customer demand and usually
referred to as 4 Ps.
 Product – means the goods and service combination the company offers to the target
market in form of variety, quality, design, features, brands, packaging etc. involve things
 like new product dev’t, and product life cycle (course of a products’ sale & profit over its
lifetime) 1) product dev’t 2)introduction 3)Growth 4)Maturity 5) Decline
 Price – amount of money customers have to pay to obtain the product/service. Or sum of
values customers exchange for the benefits of having or using the product/service. Price
decision factors (internal & external). Cost-based pricing, value-based pricing,
competition-based pricing. Then there must be firms’ pricing strategies line market-
skimming pricing, market-penetration pricing, product bundle pricing, discount pricing,
psychological pricing or promotional pricing
 Place – this includes company’s activities that make the product available to target
consumers. Considers distribution channels, supply chains both upstream & downstream,
value delivery network, transportation, dealerships, coverage, inventory and logistic.
 Promotion – activities that communicate the merits of the product and persuades target
customers to buy it. Advertising, online ads, personal selling, sales promotions, PR

The 4 Ps concept takes the seller’s view point of the market not the buyer’s view. From the
buyer’s viewpoint in this age of customer relationship, the 4 Ps are better described as 4 Cs
Product - Customer solution (buy value/solutions to their problems)
Price - Customer cost (total cost of obtaining, using & disposing)
Place - Convenience (conveniently available as possible)
Promotion - Communication (have a two-way communication).
Therefore, you must start with the 4 Cs to build the 4 Ps
Managing the market effort
This involves market analysis, planning, implementation and control.
 Market analysis – starts with complete analysis of the company’s situation - SWOT
 Market planning- involves overall planning & strategic planning where a co. decides
what it wants to do with each business unit. Objectives & issues, Market strategies that
help them attain its strategic objectives – product/brand plans, action progs., budgets.
 Implementation – process that turns marketing plans into actions in order to accomplish
strategic marketing objectives.
 Control – process of evaluating or measuring results and taking corrective actions.

FINANCE FUNCTION

Managing the finances of a business organization to realize its purpose is an important function –
decision making and actions regarding finances.
This is the control of the receipts and disbursements of financial resources with a view to
maintaining the profitability, liquidity and solvency of an org. so as to enable it fulfill its
objectives.
 Profitability – Ability of the operations of the business to generate enough revenue to
cover its costs
 Liquidity – the orgs’ ability to meet its day-to-day obligations e.g. salaries
 Solvency – orgs’ ability to liquidate its long-term liabilities and reward its owners (able
to pay off and increase owner’s equity)

The finance function in business org. involves the following;

1. The estimation of the required funds and the purpose for which to avoid problems of
insufficient or excess capital
2. The determination of the various sources of finances because different sources have
different implications and each has to be evaluated.
3. Planning and controlling the utilization of finances to ensure maximum efficiency of
operations and also ensure the firm remains solvent.
4. Generating and building internal surplus to finance growth and expansion.
5. Ensuring a fair Return on Investment (ROI) – shareholders equity

Roles of finance manager

 Defining suitability of the business in relation to profitability, liquidity and solvency
(shifting from the traditional role of looking for where to find finances)
 To determine the acceptable cost of funds in relation to org’s profitability
 To determine or prescribe the acceptable size of business

Capitalization/ Raising finance

This refers to the process of determining the plan of patterns of financing
Involves determining capital requirements, mix and sources.

Capital refers to the total investment of a company in money, tangible assets like buildings and
intangible assets like goodwill.
 Fixed capital – investments in fixed assets like plants, machinery, land, furniture etc. – to
meet the long-term requirements of the business
 Working capital – it’s the money required for purchase of raw materials and for meeting
the day-to-day expenditures on wages, rent, taxes etc.
Considerations for raising finances
 Viability of the venture – rate of return has to be high than the cost of financing
 Life of the venture – shouldn’t be longer than the sources of finance (don’t serve long-
term venture on short-term sources)
 Capital structure – working or fixed capital proportions
Sources of funds
Required for both fixed and working capital as short-term or long-term funds.
They can be internal or external sources as owned resources or borrowed funds.
Owned
 Internal resources – savings,
 Ordinary shares
Outside sources/borrowed
 Suppliers’ credits
 Overdrafts
 Loans
 Mortgages and leases

Cash flow management

Monitoring income/revenue – cash receipts
Monitoring expenditure – disbursements
Reasons for cash management
1. Transaction purposes
2. Precautionary motives – a need to meet any unforeseen circumstances
3. Speculative – to take up business opportunities
Objectives
 To ensure availability of cash whenever needed
 To plan properly for cash needs and investments
 To provide accurate accounting records for cash receipts, disbursements and balances
 To prevent/minimize loss through fraud
 To provide optimum balance to ensure new investments and cash obligations
Types of cash
 Cash at hand
 Cash in stocks
 Cash at bank
 Debtors
However, cash doesn’t only exist in cash but in assets, which can be converted into cash like
 Treasury bills
 Bank balances
 Government promissory notes
 Fixed deposits
 Marketable securities
Preparing accounts/Accounting
This is the process of identifying, measuring, and communicating economic or financial
information to permit informed decisions and judgments to be made.
Or an art of recording, classifying, summarizing, communicating and interpreting financial data
  Accounts facilitate decision making of financial data.
 Accounting is called the language of business because it is a means through which
business information is communicated.

Roles of accounting
Ultimate role is to provide information for decision making – processed data to base on
 Tell whether profit or loss was made (this aids planning) way forward – looks at the
previous performance & summarizes the income
 Means of accounting to owners of wealth (shareholders) – monitor the progress of the
business
 Monitoring debtors and creditors – who owes you or you owe money
 Basis for tax assessment (income tax returns)

Users of accounting information

Internal users
 Management
 Employees and TUs
External
 Shareholders/investors
 Creditors – financial institutions and suppliers
 Government – including tax authorities
 General public – firms use our resources & environment
 Donors – interested in accountability

Financial accounting process

1. Documentation- once a transaction has occurred has to be recorded. This acts as evidence
or source of information
2. Recording in books of original entry (journals) – putting data into the books of account
3. Posting to the ledger – this is the store place of accounts- all transaction put together.
4. Trial balance – this is a list of debit and credit balances extracted from the ledger at end
of a specific period usually a month – to check arithmetic accuracy and if correct rules of
double entry were observed
5. Make end of year adjustments/provisions – made for prepayments or prepaid expenses,
accruals, bad/doubtful debts, depreciation of fixed asset, and provision for tax
6. Preparation of final accounts/financial statements-income statement/trading, profit & loss
account, balance sheet (financial position of an org)
7. Interpretation of financial statements – link with all other functional areas

Questions
1. Discuss the main activities of the finance function in an organization.
2. a) What is capitalization, and what factors would you consider when raising finances
b) Give and explain the various sources of funds.