Managing the

Finance Function
Presented by:

GROUP 6
Almira Tinaytina Jayson Doloriel
J e f f e r s o n Tu g a h a n J o h n E d d r i e n Tu b o n g b a n u a
Jun Jorly Maree Angelique Villegas
N i ñ o B e n e d i c t Va l d e z Shariah Brittany Melon
WHAT THE FINANCE FUNCTION IS? FR
• The finance function is an important management responsibility
that deals with the “procurement and administration of funds
with the view of achieving the objective of business” . If the
engineer manager is running the firm as a whole, he must be
concerned with the determination of the amount of funds
required, when they are needed, how to procedure them, and
how to effectively and efficiently use them.
• In the performance of his duties, the engineer manager, at
whatever management level he is, must do his share in the
achievement of the financial objectives of the company.
• The finance function is one of the three basic management
functions. The other two are production and marketing.
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THE DETERMINATION OF FUND REQUIREMENT FR
- Any organization, including the engineering firm, will need
funds for the following specific requirement:
1. to finance daily operations

2. to finance the firm’s credit services

3. to finance the purchase of inventory

4. to finance the purchase of major assets

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FINANCING DAILY OPERATION FR
- The day to day operation of the engineering firm will require funds to
take care of expenses as they come. Money must be made available for
the payment of the following:

1. wages and salaries

2. rent
3. taxes
4. power and light
5. marketing expenses like those for advertising, entertainment , travel
expenses, telephone and telegraph, stationary and printing , postage ,
etc.
6. administrative expenses like those for auditing, legal, services, etc.
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FINANCING THE FIRM’S CREDIT SERVICES FR
- It is oftentimes unavoidable for firms to extend credit to
customers. If the engineering firm manufactures products, sales
terms vary from cash to 90 days credit extensions to customers.
Construction firms will have to finance the construction of
government projects.
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.
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FINANCING THE PURCHASE OF MAJOR ASSET FR
- Companies at times, need to purchase major assets.
When top management decides on expansion, there
will be a need to make investment in capital assets like
land, plant, and equipment
- It is obvious that the financing of the purchase of
major assets must come from long-term sources.

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THE SOURCES OF FUNDS FR
- To finance its various activities, the engineering firm will have to make
use of its cash inflows coming from various sources, namely:
1. Cash sales - Cash is derived when the firm sells its products or services
2. Collection of Accounts Receivable - Some engineering firms extend credit to
customers. When these are settled, cash is made available.
3. Loans and Credits - When other sources of financing are not enough, the
firm will have to resort to borrowing.
4. Sale of Assets - Cash is sometimes obtained from the sale of the company’s
assets.
5. Ownership contribution - When cash is not enough, the firm may tap its
owners to provide more money.
6. Advances from Customers - Sometimes, customers are required to pay cash
advances on orders made. This helps the firm in financing its production
activities
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SHORT-TERM SOURCES OF FUNDS FR
- Loans and credits may be classified as short-term, medium-term, or long-term.
Short-term sources of funds are those with repayment schedules of less than one
year. Collaterals are sometimes required by short-term creditors.

Advantages of short-term credits

• When the engineering firm avails of short-term credits, the following advantages may be
derived:
1. They are easier to obtain.
- Creditors maintain the view that the risk involved in short-term lending is also short-term. Thus,
short-term credits are made easily available to qualified borrowers.
2. Short-term financing is often less costly.
- Since short-term financing is favored by creditors, they make it available at less cost.
3. Short-term financing offers flexibility to the borrower.
- After the borrower has settled his short-term debt, he may consider other means of financing, if he
still requires it. Long-term financing, in contrast, eliminates this option. He is stuck with the long-term
funds even if he no longer requires it.
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Disadvantages of short-term credits FR
• Short-term financing has also some disadvantage. They are
as follows:
1. Short-term credits mature more frequently.
- This may place the engineering firm in a tight position more often than
necessary. When the frequently of the firm’s cash inflows are more than
twelve months apart, the firm could be in serious trouble meeting its
short-term.
2. Short-term debts may, at times, be more costly than long-term
debts.
- When short term expenditures, the frequent renewals, adjustment of
terms, and shopping for new sources may prove to be costlier.

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Supplies of short-term funds FR
• Short-term financing is provided by the following:
1. Trade creditors - refer to suppliers extending credit to a buyer for use in
manufacturing, processing or reselling goods for profit.
2. Commercial banks - are institutions which individuals or firms may tap as
source of short-term financing.
3. Commercial paper houses - are those that help business firms in borrowing
funds from the money market.
4. Finance companies - are financial institutions that finance inventory and
equipment of almost all types and sizes of business firms.
5. Factors - are institutions that buy the accounts receivable of firms, assuming
complete accounting and collection of responsibilities.
6. Insurance companies - are also possible sources of short-term funds.

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LONG-TERM SOURCES OF FUNDS FR
• There are instances when the engineering firm will have to tap the long-term
sources of funds. An example is when expenditures for capital assets become
necessary. After the amount required is determined, a decision has to be made on
the type of sources to be used.
• Long-term sources of funds are classified as follows:
1. long-term debts
2. common stocks, and
3. retained earnings.

Term loans
• A term loan is a “commercial or industrial loan from a commercial bank,
commonly used for plant and equipment, working capital, or debt repayment.
Term loans have maturities of 2 to 30 years.

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• The advantages of term loans as a long-term source of funds FR
are as follows:
1. Funds can be generated more quickly than other long-term sources.
2. They are flexible, i.e., they can be easily tailored to the needs of the
borrower.
3. The cost of issuance is low compared to other long-term sources.

• Bonds. A bond is a certificate of indebtedness issued by a corporation to a lender.

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

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THE BEST SOURCES OF FINANCING FR
• As there are various fund sources, the engineer manager, or whoever
is in charge, must determine which source is the best available for the
firm.
• To determine the best source, Schall and Haley recommends that the
following factors must be considered.
1. Flexibility - some fund sources impose certain restrictions
on the activities of the barrowers.
2. Risk - when applied to the determination of fund sources,
risk refers to the chance that the company will be affected
adversely when a particular source of financing is chosen.
3. Income - the various sources of funds, when availed of, will
have their own individual effects in the net income of the
engineering firm. 14
THE BEST SOURCES OF FINANCING FR
4. Control - when new owners are taken in because of the need for
additional capital, the current group of owners may lose control
of the firm.
5. Timing - financing market has its ups and downs. This means
that there are times when certain means of financing provide
better benefits than at other times. The engineer manager must,
therefore, choose the best time for borrowing or selling equity.
6. Other factors like collateral values, flotation cost, speed, and
exposure.
• Collateral values: are there assets available as collateral?
• Flotation cost: how much will it cost to issue bonds or stocks?
• Speed: how fast can the funds required be raised?
• Exposure: to what extent will the firm be exposed to other
parties? 15
THE FIRM’S FINANCIAL HEALTH FR
• In general, the objectives of engineering firms are as
follows:
1. to make profits for the owners:
2. to satisfy creditors with the repayment of loans plus
interest;
3. to maintain the viability of the firm so that customers will
be assured of a continuous supply of products or,
employees will be assured of employment, suppliers will
be assured of a market, etc.

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INDICATORS OF FINANCIAL HEALTH FR
• The financial health of an engineering firm may be
determined with the use of three basic financial
statement. These are as follows:
1. Balance sheet- also called statement of financial position.
2. Income statement- also called statement of operations;
3. Statement of changes in financial position.

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

the appropriate financial analysis must be undertaken.
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RISK MANAGEMENT AND INSURANCE FR

• The engineer manager, especially those at the top level, is

entrusted with the function of making profits for the
company. This will happen if losses brought by improper
management of risk are avoided.
• Risk is a very important concept that the engineer manager
must be familiar with. Risks confront people every day.
Companies are exposed to them. Newspapers report on a
daily basis the destruction of life and property. Companies
that could not cope with losses are forced to shut down,
according to reports.

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RISK DEFINED FR
• Risk refers to the uncertainly concerning loss or injury. He engineering firm
is faced with a long list of exposure to risks, some of which are as follows
1. Fire
2. Theft
3. Floods
4. Accidents
5. Nonpayment of bills by customers (bed debts)
6. Disability and death
7. Damage claim from other parties

Types of risk
• Risk 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.
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What is Risk Management? FR
• Risk management is “an organized strategy for protecting and
conserving assets and people”. The purpose of risk management is to
choose intelligently from among all the available methods of dealing
with risk in order to secure the economic survival of the firm.

Methods of Dealing with Risk

• There are various methods of dealing with risks. They are as
follows:
1. The risk may be avoided
2. The risk may be retained
3. The hazard may be reduced
4. The losses may be reduced
5. The risk may be shifted
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 FR
•A person who want to avoid the risk of losing a
property like a house can do so by simply
avoiding the ownership of one. There are
instances, however, when ownership cannot be
avoided like those for equipment, appliances,
and materials used in the production process. In
this case, other methods of handling risk must
be considered.

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Thank you!