LESSON 12 MANAGING THE FINACE FUNCTION

Engineering firms need funds to finance their operation. To be assured of continues supply of funds, there is
a need to manage properly the finance function. When funds are made available in the right a mounts at the right
time, the engineering or organization may be expected to function properly. When funds are not enough to finance
planned activities, the risk of failure to achieve objective s become apparent

Finance function is an important management responsibility that deals with the 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 procure them, and how to effectively and efficiently use
them.

The Finance Function: A Process Flow

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

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

1. Short-term
Effective and 2. Long-term
efficient use of
Funds

The Determination of Fund Requirements

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

1. To finance daily operations

2. To finance the firm’s credit service
3. To finance the purchase of inventory
4. To finance the purchase of major assets

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:

1. Cash sales. Cash is derived when the firm sells its products or services.
2. Collection of accounts Receivables. Some engineering firms extend credit to costumers.
3. When these are settled, cash is made available.
 4. Loans and credits. When other sources of financing are not enough, the firm will have to resort to
borrowing.
5. Sale of assets. Cash is sometimes obtained from the company’s assets.
6. Ownership contribution. When cash is not enough, the firm may tap its owners to provide more money.
7. Advances from costumers. Sometimes, costumers are required to pay cash advances on orders made. This
helps the firm in financing its production activities.

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-terms
creditors.

Advantages of short-term credits. When the engineering firms avails of short-term credits, the following
advantage maybe derived:

1. They are easier to obtain. Creditors maintain the view that risk involved in short-term lending is also short-term.
Thus, short-term credits are made easily available to qualified borrowers.

2. Short-terms financing is often less costly. Since short-term financing is favoured by creditors, they make it
available at less cost.

3. Short-term financing offers flexibility to the borrower. After the borrower debt, he may consider other mains 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 disadvantages. They are as follows:

1. Short-term credits mature more frequency. This may place the engineering firm in tight position
more often necessary.
2. Short-term debts may, at times, be more costly the long term dept.

Long term Source of fund

There are instance when the engineering firm will have to tap the long term source of funds. An example is when
expenditures for capital assets become necessary. After the amount required is determined, a decision has to be
made of the type of source to be used.

Long term source of funds are classified as follows:

1. Long term depts.

2. Common stocks, and
3. Retained earnings

THE BEST SOURCE OF FINANCING

To determine the best source, Schall and Haley recommend that the following must be considered

1. Flexibility 2. Risk 3. Income 4.control5.timing

6. Other factors like collateral values, flotation cost, speed, and exposure
Flexibility

Some funds sources impose certain restriction on the activities of the barrowers. An example of a restriction is the
prohibition on the issuance of additional debt instruments by the barrower.

Risk

Generally, short term dept. “subjects the barrowing 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 terms as the previous one, if they can be renewed at all.
2. Since repayment are done more often, the risk of defaulting is greater.

Income

The various source of funds, when availed of will have their own individual effects in the net income of the
engineering firm, when the firm barrowing and still be left with sufficient returns for the owners.

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. If the current owners do not want this to happen, they must consider other means of financing.

Timing

The financial market has its ups and downs. This means that there ate thing when certain means of financing provide
better benefits than other times. The engineer manager must, therefore, choose the best time for barrowing or selling
equity.

Other Factors

There are other factors considered in determining the best source of funds. They are flows:

1. Collateral values: Are there assets available as collateral?

2. Flotation cost: How much: 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

IINDICATORS OF FINACIAL HEALTH

The financial health of an engineering firm may be determined with use three basic financial statements. 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

Activity

1. What is the finance function? How important is it to the engineering firm?

2. What is the difference between short term and long term sources of funds?
3. How may one determine the best source of financing?

POST TEST: Write a case analysis for the following case.

CASE 10: Four Aces Construction and Hardware Supply: Here, there, and everywhere
POST TEST:

Write a case analysis for the following case.

CASE 12: Four Aces Construction and Hardware Supply: Here, There and Everywher

In 1964, four girls who were in their fourth year high school at St. Mary’s in Bayombong, Nueva Viscaya, made a
pact that they must be together even after college .The girl consisting of Gloria Tadino, Rosemarie Ginez, Ligaya
Sibastaian and Rosalie Chico were the brightest in the graduating class . They parted ways in college, however.

Gloria went to finish a civil engineering course at the University of San Agustin .Rosemarie got her
industrial engineering course at the University of Manila.Ligaya was awarded a diploma in sanitary engineering by
National University. Rosalie graduated with a business management degree at St. Paul College.

In 1973, the four were reunited at the birthday party of Gloria. All four were already working and have
good paying jobs. Rosemarie mentioned to her friends that maybe they should put up a business. All agreed and
within a short period, they opened a construction and hardware supply store in Bayombong. A capital contribution
of P 100,000 each was placed in a common equity fund. The store carried the name Four Aces Construction and
Hardware Supply (FACHS) and Ligaya was assigned as store manager. The operation was successful that after store
manager. The operation was successful that after two years, the firm’s value was placed at p 956, 00.

A second store was opened in 1976 at nearby Solano town was assigned to Gloria. The operation was also a
success. This prompted the four to open another store in Santiago City Under the manager ship of Rosemarie and a
fourth one in San Jose City under the care of Rosalie.

The company was able to maximize profits by installing a centralized purchasing system. As a result,
volume discount and credit extensions were granted by the suppliers. The company was able to institute an effective
personnel development program.

By December 1997,FACHS’ asset were valued at over p 75 million .The four ladies realized that an
opportunity for expansion exist but they are not getting any younger as all of them are already fifty years old. In
addition, expansion would mean additional funds will be required. Nevertheless, they thought that it would be nice
to allow the business to grow even if they are no longer capable of doing so. S all of them are already married and
have children, the idea was deemed appropriate.

As Gloria, Ligaya, Rosemarie, and Rosalie faced each other in meeting, they hoped that options will be
brought up by anybody to help them solve their problem.

SYNTHESIS

The first area of concern is the determination of fund requirements. The next step is to determine the source of fund.

When the internal source of financing is not enough external sources may be tapped such as loans and credits.

For external source consider: flexibility, risk, income, control, timing and others.

Indicators of financial health include: liquidity, efficiency, financial leverage, and profitability,

An important aspect in in managing finance function is risk management. Protect assets and human resource

Handle risk by: risk avoidance, risk retention, hazard reduction, loss reduction, and risk shifting.

REFERENCES

Engineering Management BY

Robert G. Medina

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