TECHNOLOGICAL UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ENGINEERING
DEPARTMENT OF CIVIL ENGINEERING

BES4-M – ENGINEERING MANAGEMENT

Managing the Finance Function

BSCE – 3H

ANCIANO, JUSTINE
BALACQUIT, FRANCIS O
MORENO, DALE MARK S.
TAPANG, JOSEPH CYRIL I.

ENGR. MARJUN MACASILHIG

INSTRUCTOR
1. What the Finance Function Is
1.1. Finance Function
The Finance Function is an important management responsibility that deals
with the procurement and administration of Funds with the View of achieving
the objectives of business.
In terms of the application in Engineering Management, Engineer manager who
runs a certain Firm (Construction Firm), must be concerned with the
determination of the amount of funds required, when they are needed, how to
procure them, and how to use them effectively and efficiently.
In simple terms, Engineer Manager has a responsible in determining amounts,
Strategies to gain funds, Manage & Allocate effectively the budget in order to
start Progress and finish the Project.

2. Determination of Funds
2.1. An Organization, Firm Even a Company will need Funds in order to progress
of what the manager or leader goals. Or, at in the others perspective is to
accomplish the Project.
There was a general requirement must an Engineer Manager to consider which
aspect or sector must to be allocated the budget of the firm.

• to finance daily Operations

• to finance the firm’s Credit Services
• to finance the Purchase of inventory
• to finance the Purchase of major assets

2.1.1. Financing Daily operations - it pertains to the day to day funds that must be
High in consideration due to the fact that there some daily consumptions
needed to acquire such as:
2.1.1.1. At Sight or Field
• Food & Drinkable Water
• Laborer’s Wage and Salaries
• Electricity and Water
2.1.1.2. At Company of within the Firm’s Premises
• Rent
• Taxes
• Marketing Expenses such as Advertising Paraphernalia
Communication
• Administrative Expenses Like Auditing and Legal Services

2.1.2. Financing Firm’s Credit Services – It is unavoidable for the firms to extend
credit to the customers. It simply, pertains to a fund that considerably an
Accreditation Fund to the Firms Effort, Labor and Tools & equipment in order
to Finish the Project.

2.1.3. Financing Purchase Inventory – The maintenance of adequate inventory is

crucial to many firms. Raw materials, supplies and parts are needed to be kept
in storage so that they will available when needed.
It is important that Engineer Manager creates methodologies or strategies in
order the purchased or stored materials needed in the project must all
consumed within limited Allocated fund. Also, as to minimalize the amounts of
wasted materials.

2.1.4. Financing the Purchase of Major Asset – Companies, at time need to

purchase major assets. Simply, in the Firms Perspective it pertains to the
availability of the firm to expand its station of operation (Firm’s Branch). In order
to sustain the lost due to the services offer of the firm.
3. The Best Source of Financing
3.1. 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.
According to the Schall and Haley they recommended to seek these factors in
able to determine what companies had suitable for financing their Firm and able
to make progress towards to project accomplishment task.
• Flexibility
• Risk
• Income
• Control
• Timing
• Other factors like Collateral value, flotation cost, speed, and exposure.

3.1.1. Flexibility – Some fund sources impose certain restriction on the activities of
the Borrowers. Simply it pertains to the availability of the coverage of the
companies had wanted to fund the firm for the continuity of the project.

3.1.2. Risk – In description making having Risk is always been involved, in

construction Management risk it refers to the imposed limitations of the
Borrower (Lender) in terms of the Fund coverage and additional Services even
Business transaction.

3.1.3. Income – Refer to the opportunities seek by the firm in or der to cover up the
capital loss due to the Services that a Firm can offer.
Ex. A certain Construction Firm seeking to invests in PVC Pipe Production or
retailing in order to give a backup fund their CAD-design Department.

3.1.4. Control – Refers to the ability of the firm to have a Shares to other companies
who willing to open a transaction and avail funding for a certain Project without
any intension of over control.
 The firm must also offer their services to the company in the aspect of
managing expansions and Proposed Project, that firm can provide. Having ties
with company willing to fund their project, as well as the project of that certain
company will be both beneficial.

3.1.5. Timing – it is the strategy that a certain firm will Sell or buy assets or even
Borrow Funds in affordable Interest Rates. Via observing the condition of other
companies’ economic status.

3.1.6. Other Factors

3.1.6.1. Collateral value – refers to the assets that can be replacement pay for the
Funded Project.
3.1.6.2. Flotation Cost – It could be additional Charges to the Firms if these sudden
increase of required Funds to the Project.
3.1.6.3. Speed – How much does a certain Lender Company raised the fund?
3.1.6.4. Exposure – Refers how does a certain Lender Company popular of his
Funding Project Industry.
4. The Source of Funds
4.1. To finance its various activities, the engineering firm will have to make use of
its cash inflows coming from various sources, namely:
4.1.1. Cash Sales – Cash is derived when the firms sell its products or services.
4.1.2. Collection of Accounts Receivables – Some engineering firms extend credit
to customers. When these are settled, cash is made available.
4.1.3. Loans and Credits – When other sources of financing are not, the firm will
have to resort to borrowing.
4.1.4. Sale of Assets – Cash is sometimes obtained from the sale of the company’s
assets.
4.1.5. Ownership contribution – When cash is not enough, the firm may tap its
owners to provide more money.
4.1.6. Advances from customers – sometimes, customers are required to pay cash
advances on orders made. This helps the firm in financing its production
activities.

4.2. Short-Term Sources of Funds - Repayable for less than a year.

ADVANTAGES
• Easier to obtain.
• Less costly.
• Offers flexibility to the borrower
DISADVANTAGES
• Short-term credits mature more frequently.
• More costly than long-term debts

4.3. Supplies of Short-Term Funds - Short-Term financing is provided by the

following:
• Trade Creditor
• Commercial Banks
• Commercial Paper Houses
• Finance Company
 • Factors
• Insurance Companies
4.3.1. Trade Creditor - trade creditors refer to suppliers extending credit to a buyer
for use in manufacturing, processing, or reselling goods for profit. The
instruments used in trade credit consist of the following:
• Open-book credit
• Trade Acceptance
• Promissory Notes
4.3.1.1. Open-book credit is unsecured and permits the customer to pay for goods
delivered to him in a specified number of days. For financially weak
engineering firms, the open-book credit is very useful source of financing.
4.3.1.2. Trade Acceptance is a time draft drawn by the seller upon a purchase
payable to the seller as payee, and accepted by the purchaser as a
evidence that the goods shipped are satisfactory and that the price is due
and payable.
4.3.1.3. 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 certain sum of money to, or to the
order of, a specified person or to bearer.
4.3.2. Commercial Banks – are institutions which individuals or firms may tap as
source of short-term financing.
Commercial banks grant two types of short-term loans:
• Requires collateral.
• Does not require collateral.
4.3.3. Commercial Paper Houses – are those that help business firms in borrowing
funds from the money market.
4.3.4. Business Finance Companies - are finance institutions that finance inventory
and equipment of almost all types and sizes of business firms.
4.3.5. Factors – are institution that buy the accounts receivable of firms, assuming
complete accounting and collection responsibilities.
4.3.6. Insurance Companies – Industry reports indicate that insurance companies
in the Philippines regularly make investments in short-term commercial papers
and promissory notes.

4.4. Long-Term Sources of Funds

There are instances when the engineering firm will have to tap the long-term
sources of funds. An example is when expenditures for capital assets become
necessary. After the amount required is determined, a decision has to be made
on the type of sources to be used.
Long-term sources of funds are classified as follows:
• Long-term Debt
• Common Stocks
• Retained Earnings
4.4.1. Long-term Debts - are sub-classified into term loans and bonds.
4.4.2. Term Loans – 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.
This are the advantages of term loans as a long-term source of funds:
Funds can be generated more quickly than other long-term sources.
They are flexible, i.e., they can be easily tailored to the needs of the borrower.
The cost of insurance is low compared to other long-term sources.
4.4.3. Bonds – A bond is a certificate of indebtedness issued by 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 other person, investors are attracted
to buy them.
5. The Firm’s Financial Health and Financial Health Indicators
5.1. The Firm’s Financial Health
In general, the objectives of engineering firms are as follows:
• to make profits for the owners.
• to satisfy creditors with the repayment of loans plus interest.
• to maintain the viability of the firm so that customers will be assured of
a continuous supply of products and services, employees will be
assured of employment, suppliers will be assured of a market, etc.
The foregoing objective have better chances of achievement if the engineering
firm is financially healthy and has the capacity to be so on a long-term basis.

5.2. Indicators of Financial Health

The financial health of an engineering firm may be determined with the use of
the three basic financial statement. These are follows:
• Balance Sheet – or also called as financial position.
• Income Statement – also called as statement of operations.
• Statement of changes in financial positions
To be able to determine the financial health of a firm, the appropriate financial
analysis must be undertaken. A full discussion of financial statement and
analysis are indicated in Chapter 9. Example of balance sheet and income
statement are also presented in Chapter 9. An example of statement of
financial positions is shown in figure 12.4.
6. Risk Management and Insurance
6.1. Risk Management & Insurance
The engineer manager, especially those at the top level, is entrusted with the
function of making profits for the company. This would happen if losses brought
by improper management of risks are avoided. Companies that could not cope
with losses are forced to shut down, according to reports. Fortunately, the
engineer manager is not entirely helpless. He can use sound risk management
practices to avoid the threat of bankruptcy due to losses.

6.2. Risk
Risk refers to the uncertainty concerning loss or injury. The engineering firm
with a long list of exposure to risk, some of which are follows:
• Fire
• Theft
• Floods
• Accidents
• Nonpayment of bills by customers
• Disability and death
• Damage claim from other parties

6.3. Types of Risk

• 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.
• Speculative risk is one in which there is a chance of either loss or gain.

6.4. What is Risk Management?

Risk management is “an organized strategy for protecting and conserving
assets and people.” The purposeof risk management is “to choose intelligently
from among all the available methods of dealing with risk in order tosecure the
economic survival of the firm”.
6.5. Methods of Dealing with Risk
There are various methods of dealing with risks. They are as follows:
• the risk may be avoided.
• the risk may be retained.
• the hazard may be reduced.
• the losses may be reduced.
• the risk may be shifted.
6.5.1. Avoided – a person who wants to avoid the risk of losing a property like a
house can do so by simply avoiding the ownership of one.
6.5.2. Retained – risk retention is a method of handling risk where in the management
assumes the risk.
6.5.3. Hazard Reduced – hazards may be reduced by simply instituting appropriate
measures in a variety of business activities.
6.5.4. Losses Reduced – when losses occur in spite of preventive measures the
severity of loss may be limited by way of reducing the concentration of
exposures.

6.6. Examples of efforts on loss reduction

• Physically separating buildings to minimize losses in case of fire;
• Using fireproof materials on interior building construction;
• Storing inventory in several locations to minimize losses in cases of fire
and theft;
• Maintaining duplicate records to reduce accounts receivable losses;
• Transporting goods in separate vehicles instead of concentrating high
values in single shipments;
• Prohibiting key employees from traveling together; and
• Limiting legal liability by forming several separate corporation.
• Shifted – another method of handling risk is by shifting it to another party.
Examples of risk shifting are hedging, subcontracting, incorporation, and
insurance.

6.7. Examples of Insurance Products:

• Fire – Fire and Allied Perils, Business Interruption
• Marine – Hull Insurance, Shipowner’s LiabilityInsurance Protection and
Indemnity
• Casualty – Motorcar, Property Floater, Personal Accident,
Comprehensive General, Liability, Money, Security and Payroll, Cash in
Transit, Burglary
• Engineering – Contractor’s All Risk, Machinery Break-down,
Contractor’s Plant and Equipment All Risks, Erector’s All Risks, Boilers
and Explosion, Electronic Insurance, Consequential Loss
• Aviation – Hull and Liabilities Insurance, Airport, Operator Liability,
Hangarkeeper’s Liability, Aircraft Refueling Liability, Pilot’s License
Insurance, Pilot/Crew, Personal Accident Cover
• Bonds – All kinds of bonds