the specific activities of the operations divisions of firms differ from one another, the

basic function remains the same, ie., the production of products or services. Figures 60
and 61 show typical responsibilities of the operations divisions of two different firms.
Operations and the Manager
The manager is expected to produce some output at whatever management level he is
working. If he is assigned as the manufacturing manager, his function is to determine
and define the equip-ment, tools, and processes required to convert the design of the
desired product into reality in an efficient manner.
The manager in charge of operations in a manufacturing firm is responsible for the
actual production of whatever quantity of products his company has planned to
produce. He is required to do it using the least-expensive and the easiest methods.
The operations manager must find ways to produce the required quality of goods and
services and the reduction of costs in his department.
The typical operations manager is one with several years of experience in the operations
division and possesses an academic background in business or industrial engineering.
Types of Transformation Process
The operations manager must have some knowledge of the various types of
transformation processes. These are the following:
1. Manufacturing processes consisting of the following:
a. job shop
b. batch flow
c. work-paced line flow
d. machine-paced line flow
e. batch/continuous flow hybrid
f. continuous flow
2. Service processes consisting of:
a. service factory c. mass service
b. service shop d.professional service
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Figure 60. ORGANIZATIONAL CHART OF A MANUFACTURING FIRM

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Figure 61. ORGANIZATINAL CHART OF A CONSTRUCTION FIRM

203
Manufacturing Processes
Manufacturing processes are those that refer to the making of products by hand or with
machinery.
Job Shop. A job shop is one whose production is based on sales orders for a variety of
small lots. Job shops are very useful components of the entire production effort, since
they manufacture products in small lots that are needed by, but cannot be produced
economically by many companies. Depending upon the customer's needs, a job shop
may produce a lot consisting of 20 to 200 or more similar parts.
Job shops produce custom products in general. Products may be manufactured within a
short notice. The equipment used are of the general purpose type.
The type of layout used by job shops is the process layout, where similar machines are
grouped together. The typical size of operation is generally small. Job shops are labor
intensive and machines are frequently idle. Figure 62 shows the process flow diagram of
the job shop.

Figure 62. Process Flow Diagram of a Job. Shop

Batch Flow. The batch flow process is where lots of generally own-designed products are
manufactured. It is further characterized by the following:
1. There is flexibility to produce either low or high volumes.
2. Not all procedures are performed on all products.

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3. The type of equipment used are mostly general purpose.
4. The process layout is used.
5. The operation is labor intensive, although there is less machine idleness.
6. The size of operation is generally medium-sized.
Examples of factories using the large batch flow process are wineries, scrap-metal
reduction plants, and road-repair contractors.

Figure 63. Batch Flow Process of a Large Manufacturer of Suits

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Worker-Paced Assembly Line. The assembly line refers to the production layout
arranged in a sequence to accommodate processing of large volumes of standardized
products or services. Shown in Figure 64 is a diagram of the work flow in an assembly
line.
The quality and quantity of output in a worker-paced assembly line depends to a great
extent to the skill of the labor utilized.
Examples of worker-paced assembly lines are food marts like
McDonald's and Shakey's.
The worker-paced assembly line is characterized by the follow-
ing:
The products manufactured are mostly standardized.
2. There is a clear process pattern.
3. Specialized equipment is used.
4. The size of operation is variable.
5. The process is worker-paced.
6. The type of layout used is the line flow.
7. Labor is still a big cost item.

Figure 64. Assembly Line for Production of Goods or Services

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Machine-Paced Assembly Line. This type of production pro-@ess produces mostly
standard products with machine playing a significant role. Among its other features are
as follows:
1. The process is of clear, rigid pattern.
2. Specialized type of equipment is used.
3. The line flow layout is used.
4. Capital equipment is a bigger cost item than labor
5. Operation is large.
6, The process is machine-paced.
Examples of machine-paced assembly line are automobile manufacturers like General
Motors and Ford Motors. Shown in Figure 65 is an illustration of the machine-paced
assembly line process.
Continuous Flow. The continuous flow processing is characterized by the rapid rate at
which items move through the system. This processing method is very appropriate for
producing highly standardized products like calculators, typewriters, automobiles,
televisions, cellular phones, and the like. Its other characteristics are the following:
1. There is economy of scale in production, resulting to low per unit cost of production.
2. The process is clear and very rigid.
3. Specialized equipment are used.
4. The line flow layout is used.
5. Operations are highly capital intensive.
6. The size of operations is very large.
7. Processing is fast.
Figure 66 shows an illustration of the continuous flow process of a paper-making factory.
Batch/Continuous Flow Hybrid. This method of processing is a combination of the batch
and the continuous flow. Two distinct layouts are used, one for batch and one for the
continuous flow. The typical size of operation is also very large, giving opportunities for
economies of scale.
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Examples of companies using the batch / continuous flow hybrid are breweries, gelatin
producers, and tobacco manufacturers. An illustration of the simplified production
process using the batch/ continuous flow hybrid is shown in Figure 67.
Service Processes
Service processes are those that refer to the provision of service to persons by hand or
machinery.
Service Factory. A service factory offers a limited mix of services which results to some
economies of scale in operations. This also affords the company to compete in terms of
price and speed of producing the service.
The process layout preferred by the service factory is the rigid pattern of line flow
processing. McDonald's and Shakey's are examples of service factories.
Service Shop. The service shop provides a diverse mix of ser-vices. The layout used is
that one also appropriate for job shops or those with fixed position and are adaptable to
various requirements.
Service shops abound throughout the Philippines. Among the services provided are car
engine tune-up, wheel balancing, wheel alignment, change oil, and others. Examples of
service shops are Servitek and Toyota service units.
Shown in Figure 68 is a diagram of the process flow of a car repair service shop.
Mass Service. The mass service company provides services to a large number of people
simultaneously. A unique processing method is, therefore, necessary to satisfy this
requirement. To be able to serve many people, mass service companies offer limited mix
of services.
The process layout used is typically fixed position where customers move through the
layout. Shown in Figure 69 is a diagram of the process flow for sales transactions and
material receipt in a mass service retailing institution.
Professional Services. These are companies that provide specialized services to other
firms or individuals. Examples of such firms are the following;

210
1. Engineering or management consulting services which helps in improving the plant
layout or the efficiency of a company
2. Design services which supply designs for a physical plant, products, and promotion
materials
3. Advertising agencies which help promote a firm's products
4. Accounting services
5. Legal services
6. Data processing services
7. Health services

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Professional service firms offer a diverse mix of services. There is a lower utilization of
capital equipment compared to the service lactory and the service shop. The process
pattern used is very loose.
The process layout used is identical to the job shop.
Professional service firms are, oftentimes, faced with delivery problems brought about
by non-uniform demand. Strategies that may be used depending on the situation are as
follows:
1.the use of staggered work-shift schedules;
2. the hiring of part-time staff;
3. providing the customer with opportunity to select the level of service;
4. installing auxillary capacity or hiring subcontractors;
5. using multiskilled floating staff; and
6. installing customer self-service.
important parts of Productive systems
Productive systems consist of six important activities which are as follows:
1. product design
2. production planning and scheduling
3. purchasing and materials management
4. inventory control
5. work flow layout
6. quality control
Product Design
Customers expect that the products they buy would perform according to assigned
functions. A good product design assures that this will be so. Customers avoid buying
products with poor product design. An example is that certain brand of ballpen which
fails to Write after one or two days of actual use. This happens because of poor design.
Product design refers to the process of creating a set of product specifications
appropriate to the demands of the situation.
Companies wanting to maintain or improve their market share
Keep a product design team composed of engineers, manufacturing and marketing
specialists.
production Planning and Scheduling
Production planning may be defined as forecasting the future sales of a given product,
translating this forecast into the demand it generates for various production facilities,
and arranging for the procurement of these facilities.
Production planning is a very important activity because it helps management to make
decisions regarding capacity. When the right decisions are made, there will be less
opportunities for wastages.
Scheduling is that phase of production control involved in developing timetables that
specify how long each operation in the production process takes place. Efficient
scheduling assures the optimization of the use of human and non-human resources.
Purchasing and Materials Management
Firms need to purchase supplies and materials required in the various production
activities. The management of purchasing supplies and materials must be undertaken
with a high degree of efficiency and effectiveness specially in firms engaged in high
volume production. The wider the variety of supplies and materials required the more
purchasing and materials management is needed.
Materials management refers to the approach that seeks efficiency of operations
through integration of all material acquisition, movement, and storage activities in the
firm.
Inventory Control
Inventory control is the process of establishing and maintain. ing appropriate levels of
reserve stocks of goods. As supplies and materials are required by firms in the
production process, these must be kept available when they are needed. Too much
reserve of stocks will penalize the firm in terms of high storage costs and related risks
like obsolescence and theft. Too little reserve, on the other hand, may mean lost income
opportunities if production activities are hampered by the inavailability of materials and
supplies.

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It is, therefore, necessary that a balance between the two extremes he determined.
There are ways of achieving proper inventory control. These are the following:
1. determining re-order point and re-order quantity
2. determining economic order quantity
3. using the just-in-time (IT) method of inventory control
4. using the material requirement planning (MRP) method of planning and controlling
inventories
Work-Flow Layout
Work-flow layout is the process of determining the physical arrangement of the
production system. In the transformation pro-cess, the flow of work may be done either
haphazardly or orderly.
The job of the operations manager is to assure that a cost- effective work-flow layout is
installed. A good work-flow layout will have the following benefits:
1. minimize investment in equipment;
2. minimize over-all production time;
3. use existing space most effectively;
4. provide for employee convenience, safety, and comfort;
5. maintain flexibility of arrangement and operation;
6. minimize variation in types of material-handling equipment;
7. facilitate the manufacturing (or service) process; and
8. facilitate the design of the organizational structure.
Quality Control
Quality control refers to the measurement of products Or services against standards set
by the company. Certain standard requirements are maintained by the management to
facilitate production and to keep customer satisfied.
Poor quality control breeds customer complaints, returned merchandise, expensive
lawsuits, and huge promotional expenditures.
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summary
The management of operations is very crucial to the survival of firms. Operations refer
to the changing of inputs into useful out-puts. In the effort to manufacture products (or
service), operations management must contribute its share in the accomplishment of
the company's objectives.
The function of the operations manager is to plan, organize, and control operations in
order to achieve objectives efficiently and
effectively.
The transformation process may be classified generally as manufacturing or service
processes. These are subclassified into various types, each with built-in advantages
depending on certain conditions.
Production systems consist of various parts that complement one another in the
production task. The operations manager needs to be familiar with these different parts.

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 MANAGING THE MARKETING FUNCTION
Managers are engaged in the production of tangible or intangible goods, Some of these
managers are directly responsible an.
Pnarketing the company's products or services. if he is promoted to general manager,
both the production and marketing funcions become his overall concern.
At whatever management level the manager works, he must be concerned with
convincing others to patronize his outputs. It he is the general manager of a
manufacturing firm, he must convince people with needs to buy the products of the
company. If he is the staff officer of a top executive, he must convince his boss to con-
finuously rely on him regarding the staff services he provides.
If the foregoing statements are true, the manager has a marketing problem. He needs to
understand certain concepts related to the marketing discipline.
What is the Marketing Concept
Marketing is a group of activities designed to facilitate and expedite the selling of goods
and services.
The marketing concept indicates that the manager must try to satisfy the needs of his
clients by means of a set of coordinated acti-vities. When clients are satisfied with what
the company offers, the company is assured of continuous patronage.
The Firm and the Four P's of marketing
The business firm will be able to meet the requirements of its
Clients (or customers) depending on how it applies the concept of the four P's of
marketing which consist of the following:
1. the product (or service);
2. the price;
3. the place; and
4. the promotion.

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The Product
In the marketing sense, the term "product" includes the tangible (or intangible) item and
its capacity to satisfy a specific need.
When a customer buys a car, he is actually buying the comfortable ride he anticipates to
derive from the car. This is not to mention the psychological benefits attached to
"owning" the car like having the feeling of being recognized by others.
The services provided by the manager will be evaluated by the client on the basis of
whether or not his exact needs are met. When a competitor comes into the picture and
offers the same type of ser vice, the pressure to improve the quality of services sold by
the company will be felt. When improvement is not possible, "extras" or
"bonuses" are given to clients to motivate them to maintain loyalty to the company.
"Freebies" given by service companies have already become common tools to keep
customers happy.
The Price
The price refers to the money or other considerations exchanged for the purchase or use
of the product, idea, or service. Some companies use price as a competitive tool or as a
means to convince the customer to buy.
When products are similar in quality or characteristics, price will be a strong factor on
whether or not a sale will be made. This does not hold true, however, in the selling of
services and ideas.
This is because of the uniqueness of every service rendered or every idea generated.
When a type of service becomes standardized, price can be a strong competitive tool.
When a construction firm, for instance, charges a flat 10 percent service fee for all of its
construction services, a competitor may charge a lower rate. Such action, however, will
be subject to whether or not the industry will allow such practice.

222
The Place
If every factor is equal, customers would prefer to buy from frms easily accessible to
them. If time is of the essence, the nearest firms will be patronized.
It is very important for companies to be located in places where they can be easily
reached by their customers. Not every place is the right location for any company.
When a business firm cannot be near its customers, it uses other means to eliminate or
minimize the effects of the problem.
Some of these are:
1. hiring sales agents to cover specific areas;
2. selling to dealers in areas that cannot be covered by the company;
3. establishing branches where customers are located;
4. granting franchises in selected areas; and installing communication systems that make
it easier for customers and prospects to contact the company.
Manufacturing firms can choose any or adapt all of the above-mentioned options.
Service companies like construction firms may use them but in modified versions. An
example is the manager of a construction firm who gives commissions to whoever could
negotiate a construction contract for the firm.

223
The magic of the Internet and the cellphone now makes it possible for companies to
serve customers and prospects including those situated overseas.
The Promotion
When managers have products or services to sell, they will have to convince buyers to
buy from them. Before the buyer makes the purchasing decisions, however, he must first
be informed, persua-ded, and influenced. The activity referred to, in this case, is called
promotion.
Promotion may be defined as the activity involved in communicating information
between seller and potential buyer to influence attitude and behavior.
There are promotional tools available and the manager must be familiar with them if he
wants to use them effectively. These tools are as follows:
1. advertising;
2. publicity;
3. personal selling; and
4. sales promotion.
Advertising. Advertising is that paid message that appears in the mass media for the
purpose of informing or persuading people about particular products, services, or
institutions. The mass media referred to include television, radio, magazines, and
newspapers.
If the manager wants to reach a large number of people, he may use any of these
depending on his specific needs and his budget.
Each of the public advertising carriers, ie., radio, television, maga-zines, and newspapers,
has their own specific audiences and careful analysis must be made if the manager
wants to pick the right one.
A sample advertising message is shown in Figure 70.
Publicity. The promotional tool that features publication of news or information about a
product, service, or idea on behalf of a sponsor but is not paid for by the sponsor is
called publicity. The mass media is also the means used for publicitv. If the manager
knows how to use it, publicity is a very useful promotional tool.
His message may be presented as a news item, helpful information, or an
announcement.
A sample publicity release is shown in Figure 71.
Personal Selling. A more aggressive means of promoting the sales of a product or service
is called personal selling. It may be defined as the oral presentation in a conversation
with one or more prospective buyers for the purpose of making a sale.

225
Figure 71. An Example of a Publicity Release
Personal selling may be useful to the marketing efforts of the manager. The general
manager of a firm manufacturing spare parts, for instance, may assign some employees
to personally seek out spare parts dealers and big trucking companies and motivate
them to buy from the firm.
Sales Promotion. Any paid attempt to communicate with the customers other than
advertising, publicity, and personal selling may be considered as sales promotion.
Included as sales promotion tools are displays, contests, sweepstakes, coupons, trading
stamps, prizes, samples, demonstrations, referral gifts, and the like.
Details of a sample sales promotion ad is shown in Figure 72.
Strategic Marketing for Managers
Companies must serve markets that are best fitted to their capabilities. To achieve this
end, a very important activity called strategic marketing is considered. Under the set-up,
the following activities are undertaken:
1. selecting the target market; and
2. developing the marketing mix.

226
Selecting the Target Market
The market consists of individuals or organizations, or both, with the desire and ability to
buy specific product or service. To maximize sales and profits, the company has the
option of serving entirely or just a portion of its chosen market. Within markets are
segments with common needs and which will respond similarly to a marketing action.
Figure 73 shows an example of the various segments of a given market.

Figure 72. Details of a Sample Sales Promotion Ad

An analysis of the various segments of the chosen market will help the company make a
decision on whether to serve all or some of the segments. The segment or segments
chosen becomes the target market. Making the right choice is very crucial to the
attainment of the marketing goals of the company.

227
In selecting the target market, the following steps are necessary:
1. Divide the total market into groups of people who have relatively similar product or
service needs.
2. Determine the profit potentials of each segment.
3. Make a decision on which segment or segments will be served by the company.
Shown in Figure 73 are the various segments of the construction market. A construction
firm may choose any or all of the resi-dential, industrial, and government segments
indicated. This decision will depend, however, on the profit potentials of each segment
and the capability of the firm to serve the segment it chooses.

228
Following the example of the construction market, a smaller company may find it most
profitable to supply only the construction materials needed by the residential segment.
A bigger company, however, may find it more profitable to perform actual construction
in addition to selling construction materials.
Factors Considered in Selecting a Target Market. The target market must have the
ability to satisfy the profit objectives of the company. In selecting the target market, the
following factors must be taken into consideration:
1. the size of the market; and
2. the number and capability of competitors serving the market.

Figure 74. Total Demand and Net Demand as a Guide for Determining Target Market: A
Hypothetical Example
The total demand for the product or service in a given area must be determined first if
the company wants to serve that particular market. If there are existing businesses
serving the market, the net demand must be calculated. Figure 74 illustrates an example
of the relationship between demand and supply of a particular product. The figures
presented indicate that there is still room for another company in the market for
gasoline in Cabanatuan City.

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Developing the Marketing Mix
After the target has been identified, a mix of the marketing var-lables must be put in
place and maintained. The marketing mix will consist of application in various degrees of
the marketing variables of product, price, promotion, and place (or distribution).
Given a marketing environment, the manager can manipulate any or all variables to
achieve the company's goals. As such, the quality of the product may be improved, or
the selling price made a little lower, or the promotion activity made a little more aggres-
sive, or a wider distribution area may be covered. Any or all of the foregoing may be
undertaken as conditions warrant. As illustrated in Figure 75, all marketing activities are
focused on the target market.
Summary
To survive, companies must continuously generate income. To be able to do so, they
must sell enough quantity of their products or services. This is true with all business
firms. The proper management of the marketing function helps the manager convince
customers to patronize the firm. Specifically, the manager must know how to use
effectively the four P's of marketing consisting of the product, the price, the place, and
the promotion.
An activity called strategic marketing is designed to make sure that the marketing
objectives of the firm are achieved. Strategic marketing calls for selecting a target market
and developing an appropriate marketing mix.
The marketing mix consists of the appropriate levels of product quality, price,
promotion, and place.

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 MANAGING THE FINANCE FUNCTION
Business firms need funds to finance their operations. To be assured of adequate supply
of funds, there is a need to manage properly the finance function. When funds are made
available in right amounts at the right time, the business organization may be expected
to function properly. When funds are not enough to finance planned activities, the risk
of failure to achieve objectives becomes apparent.
The manager must understand that the finance function is a very important
management concern. This is true because without adequate funds it will be difficult, if
not impossible, to proceed with actual production of goods or services, distribution,
product deve-lopment, manpower development, and other important business
activities.
What the Finance Function Is
The finance function is an important management responsibility that is concerned with
the procurement and administration of funds with the view of achieving the objectives
of business. If the 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 they
are to be obtained, and how they could be used effectively and efficiently.
In the performance of his duties, the 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.
The Determination of Fund requirements
Business firms will need funds for the following specific requirements:
1. to finance daily operations;
2. to finance the firm's credit services;
3. to finance the purchase of inventory; and
4. to finance the purchase of major assets

234
Figure 76. The Finance Function: A Process Flow
Financing Daily Operations
The day-to-day operations of the firm will require funds to take care of expenses as they
come. Money must be 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, entertain-ment, travel, telephone,
stationery and printing, postage, and others.

235
6. administrative expenses like those for auditing, legal ser.
vices, consultancy services, and others
Any delay in the settlement of the foregoing expenses may disrupt the effective flow of
work in the company. It may also erode the public's confidence in the ability of the
company to operate on a long-term basis. Creditors, for instance, may withhold the
extension of credit to the company.
Financing the Firm's Credit Services
The extension of credit to customers is, oftentimes, unavoid-able. The sales terms of
manufacturing firms vary from cash to 90-day credit. Construction firms will have to
finance the construction of government projects that will be paid many months later.
When a newly established chemical manufacturing firm finds difficulty in convincing
distributors to carry their products, a credit extension may solve the problem. A new
concern, however, will appear, i.e., how the credit arrangement will be financed.
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
required material inputs in the production process, so these must be kept ready
whenever required.
The purchase of adequate inventory, however, will require sufficient funding and this
must be secured.
Sometimes, inventories unnecessarily tie-up large amounts of funds. The manager must
devise some means to make sure this situation does not happen.
Financing the Purchase of Major Assets
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.
236
Sources of Funds
To finance its various activities, the business firm will have to make use of its cash
inflows consisting of the following:
1. Cash sales. Cash flows into the coffers of the firm when it is able to sell its products or
services.
2. Collection of accounts receivables. Some business firms extend credit to customers.
When these are settled by the customers, cash is made available to the firm.
3. Loans and credits. When other sources of financing are not enough, the firm will have
to resort to borrowing and cash is made available to the firm.
4. Sale of assets. Cash is sometimes obtained from the sale of the company's assets. First
to be sold are the company's idle assets.
5. Ownership contribution. When cash is not enough, the firm may tap its owners to
invest 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.
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 company avails of short-term credits, the
following advantages may be derived:
-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 lower cost to the borrower.
Short-term financing offers flexibility to the borrower. After the borrower has settled his
short-term debt, he may consider other.

237
means of financing, if he still requires it. Long-term financing, in contrast, eliminates this
option. The borrower is stuck with the long-term funds even if he no longer needs it.
Disadvantages of Short-Term Credits. Short-term financing has also some
disadvantages. They are the following:
1. Short-term credits mature more frequently. This may place the firm in a tight position
more often than necessary. When the fre. quency of the firm's cash inflows are more
than twelve months apart, the firm could be in serious trouble meeting its short-term
obligations.
2. Short-term debts may, at times, be more costly than long-term debts.
When short-term debts are used to finance long-term expen-ditures, the frequent
renewals, adjustments of terms, and shopping for new sources may prove to be more
costly.
Suppliers 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; and
6. insurance companies.
Trade creditors are those suppliers extending credit to buyers engaged in manufacturing,
processing, or reselling goods for pro-fit. The instruments used in trade credit consist of
the following:
(1) open book credit, (2) trade acceptance, and (3) promissory notes.
The open-book credit is unsecured and permits the customer to pay for goods delivered
to him within a specified number of days.
The open-book credit is a very useful source of financing for financially weak firms.
The trade acceptance is a time draft drawn by a seller upon a purchase payable to the
seller as payee, and accepted by the purchaser as evidence that the goods shipped are
satisfactory and that the price is due and payable. Under the terms granted in the trade.
Figure 77. The Firm's Finances and Cash Flow
acceptance, the seller allows the buyer to pay within a certain number of days. The
arrangement provides the buyer some relief in financing his short-term requirements.
A promissory note is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay, on demand or at a fixed or determinable
future time, a sum certain in money to, or to the order of, a specified person, or to
bearer.
Commercial banks are institutions which may be tapped as sources of short-term
financing by individuals or firms. Two types of short-term loans are made available by
commercial banks: (1) those which require collateral, and (2) those which do not require
collateral.
Commercial paper houses are those that assist business firms in borrowing funds from
money market investors. Under this scheme, the business firm in need of funds issues
commercial paper, which is actually a short-term promissory note, generally unsecured,
and issued by large, established firms. The commercial paper is sold to investors through
the commercial paper house.
Business finance companies are financial institutions involved in financing inventory and
equipment of almost all types and sizes of business firms. A number of finance
companies are currently operating in the Philippines.
Factors are institutions that buy the accounts receivables of firms, assuming complete
accounting and collection responsibilities.Business firms which maintain sizable amounts
of accounts receivable may avail of the services of factors when they are in dire need of
cash.
Insurance companies are also possible sources of short-term funds. Industry reports
indicate that insurance companies in the Philippines regularly make investments in
short-term commercial papers and promissory notes.

239
Long-Term Sources of Funds
There are instances when the company must tap 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 source to be used.
Long-term sources of funds are classified as follows:
1. long-term debts;
2. common stocks; and
3. retained earnings.
Long-term debts are sub-classified into term loans and bonds.
Term Loans. A term loan is a commercial or industrial loan from a commercial bank,
commonly used for plant and equipment purchase, working capital, or debt repayment.
Term loans have maturities of between 2 to 30 years.
The advantage 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. Since the ownership of bonds can
be transferred to another person, investors are attracted to buy them.

Figure 78. types of bonds

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Common Stocks. The third source of long-term funds comes with the issuance of
common stocks. Since common stocks represent ownership of corporations, many
investors are placing their money in them.
When properly utilized, common stocks as long term source of funds can be cheaper and
more stable source. Unlike bonds and long-term loans which must be repaid at a certain
date, common stocks do not have maturity and repayment dates.
Retained Earnings. Corporate earnings not paid out as dividends are referred to as
retained earnings. This simply means that whatever earnings that are due to the
stockholders are reinvested.
Because these retained earnings can be used by the firm indefinitely, they become an
important source of long-term financing. In like manner, the sole owner of a business
firm may decide to reinvest whatever profits he derives from his business. The same
decision may be adapted by the owners of a partnership.
The Best source of Financing
As there are various fund sources, the manager or whoever is in charge of running the
business, must determine which source is the best available for the firm.
In determining the best source of financing, the following factors must be considered:
1. flexibility;
2. risk;
3. income;
4. control;
5. timing; and
6. other factors like collateral values, flotation costs, speed,
and exposure.
• Flexibility
Some fund sources impose certain restrictions on the activities of the borrowers. An
example of a restriction is the prohibition Of the issuance of additional debt instruments
by the borrower.
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As some fund sources are less restrictive, the flexibility factor must be considered. In
general, however, short-term sources offer more flexibility than long-term sources. This
is so because after setting the debt, short-term borrowers may shift to other types of
financing. Long-term borrowers are given this opportunity only after a longer period of
waiting.
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 is chosen.
Generally, short-term debt subjects 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 terms as the previous one, if
they can be renewed at all.
2. Since repayments are done more often, the risk of defaulting is greater.
Income
The various sources of funds, when availed of, will have their own individual effects in
the net income of the business firm. When the firm borrows, it must generate enough
income to cover cost of borrowing and still be left with sufficient returns for the owners.
It is possible that the owners were enjoying higher rates or return on their investments
before borrowing was made. At other times, however, the reverse may happen.
Nevertheless, the effects on income must be considered in determining the source of
funding to be used.
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's management. If the current owners do
not want this to hap-pen, they must consider other means of financing.
Timing
The financial market has its ups and downs. This means that there are times when
certain means of financing provide better.

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benefits than at other times. The manager must, therefore, choose the best time for
borrowing or selling.
Other Factors
There are other factors considered in determining the best source of financing. They are
the following:
1. Collateral values: Are there assets available as collateral?
2. Flotation costs: 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?
The Firm's Financial Health
In general, the objectives of business firms are as follows:
1. To make profits for the owners;
2. To satisfy creditors with the repayment of loans with interest; and
3. To maintain the viability of the firm so that customers will be assured of a continuous
supply of products or services, employees will be assured of employment, suppliers will
be assured of a market, and others.
The foregoing objectives have better chances of achievement if the business firm is
financially healthy and has the capacity to be so on a long term basis.
indicators of Financial Health
The financial health of a company may be determined with the use of three basic
financial statements. These are the following:
1. The balance sheet - also called statement of financial position;
2. The income statement - also called the statement of operations; and
3. The statement of changes in financial position.

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To be able to determine the financial health of a firm, the appropriate financial analysis
must be undertaken. A full discussion of financial statements and analysis are indicated
in Chapter 11.
Examples of balance sheet and income statements are also presented in Chapter 11. An
example of a statement of changes in financial position is shown in Figure 79.
You sent

Figure 79. A Sample Statement of Change in Financial Position

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 Risk Management and insurance
The manager, specially the one 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
risks are avoided.
Risk is a very important concept that the manager must be familiar with. Risks confront
people every day. Companies are exposed to them. Actuall, newspapers are filled with
reports on a daily basis with the destruction of life and property. Companies that could
not cope with losses are naturally forced to shut down.
Fortunately, the manager is not entirely helpless. He can use sound risk management
practices to avoid the threat of bankruptcy due to losses.
Risk Defined
Risk refers to the uncertainty concerning loss or injury. The business 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. nonpayments of bills by customers (bad debts);
6. disability and death; and
7. damage claim from other parties.
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.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
speculative risk is investment in common stocks. If one wants to make gains in the
common stock market, the nuances and intricacies of investments must be learned and
properly applied. Also, operating the business firm is a kindof speculative risk. If profits
are expected, then proper management techniques must be used.
 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.
Risk management is designed to deal with pure risks, while the application of sound
management practices is directed towards speculative risks that are inherent to the
business and cannot be avoided.
Methods of Dealing with Risk
There are various methods of dealing with risks. These are the following:
1. the risk may be avoided;
2. the risk may be retained;
3. the hazard may be reduced;
4. the losses may be reduced; and
5. the risk may be shifted.
A person who wants to avoid the risk of losing property like his house can do so by
simply avoiding the ownership of one. There are instances, however, when ownership
cannot be avoided like when it is really needed, for instance, equipment, appliances, and
materials used in the production process. In that case, other methods of handling risk
must be considered.
Risk retention is a method of handling risk wherein the management assumes the risk.
The planned risk retention, also called self-insurance, is a conscious and deliberate
assumption of a recognized risk. In such case, management decides to pay losses out of
currently available funds. Unplanned risk retention exists when management does not
recognize that a risk exists and unwisely believe that no loss could occur.

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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. Theft and accidents will be greatly
reduced if the above-mentioned prohibitions are implemented.
When losses occur in spite of preventive measures, the severity of loss may be limited by
way of reducing the concentration of exposures. Examples of efforts on loss reduction
are as follows:
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 on single
shipments;
6. prohibiting key employees from traveling together; and
7. limiting legal liability by forming several separate corpo-rations.
Another method of handling risk is by shifting it to another party. Examples of risk
shifting are hedging, subcontracting, incor-poration, and insurance.
Hedging refers to making commitments on both sides of a transaction so the risks offset
each other.
When a contractor is confronted with a contract bigger than his company's capabilities,
he may invite subcontractors so that some of the risks may be shifted to them.
In a corporation, a stockholder is able to make profits out of his investments but without
individual responsibility for whatever errors in decisions are made by management. The
liability of the stockholder is limited to his capital contribution.

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 Figure 80. Typical Products Sold by an insurance Company

Summary
Financing the business firm is a very important management activity. There is a need to
assure everyone concerned that funds are available when they are needed
The first area of concern is the determination of fund require-ments. If the amount
needed is already known, the next step is to determine the appropriate source of
financing.
The various fund sources have their own individual strengths and limitations, it is wise to
find out through analysis which will benefit the business firm most.
When the internal sources of funds are not enough to finance operations, external
sources like those firms granting loans and credits may be tapped.

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In the determination of the best source of financing, the following factors must be
considered: flexibility, risk, income, control, timing, and others.
To achieve its goal, the business firm must be financially healthy.
There are certain indicators of financial health. They are broadly classified into the
following categories: liquidity, efficiency, financial leverage, and profitability.
An important aspect of managing the finance function is risk management. When assets
and human resources are protected and conserved, the company is well on its way to
achieve its objectives.
The various means of handling risks are: risk avoidance, risk retention, hazard reduction,
loss reduction, and risk shifting.

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