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Managing the
Finance Function .
Management of Engineering Projects
Assoc. Prof. Liza Marie B. Nuevo, MSEE
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TOPICS

What is the The Determination Sources of Funds

Finance
Function? of Fund
Requirements

The Best The Firms Indicators of Risk

Source of Financial Financial Management
Financing Health Health and Insurance
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Managing the Finance Function

● Engineering firms need funds to finance their operations.

● To be assured of continuous 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 engineering 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.
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What is Finance Function?

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What is 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. 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.
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The Determination of Fund Requirements

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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 services
3. to finance the purchase of inventory
4. to finance the purchase of major assets
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The Determination of Fund Requirements

Financing Daily Operations
The day-to-day operations 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, stationery and printing, postage, etc.
6. administrative expenses like those for auditing, legal, services, etc.
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The Determination of Fund Requirements

Financing the Firm's Credit Services
It is oftentimes unavoidable for firms to extend credit to customers. If the engineering firm manufactures
products, sales terms vary from cash to 90-day credit extensions to customers. Construction firms will
have to finance the construction of government projects that will be paid many months later.
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The Determination of Fund Requirements

● 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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The Determination of Fund Requirements

● Financing the Purchase of Major Asset
● 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
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The Sources of Funds

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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.
2. Collection of Accounts Receivables.
3. Loans and Credits.
4. Sale of assets.
5. Ownership contribution.
6. Advances from customers.
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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
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Short-term Sources of Funds

Disadvantages of Short-Term Credits. Short-term financing has also some
disadvantages. 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
frequency 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 expenditures, the
frequent renewals, adjustment of terms, and shopping for new sources may
prove to be more costly
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Short-term Sources of Funds

Supplies of Short-Term Funds. Short-term financing is provided by
the following
1. trade creditors Trade creditors refer to suppliers extending
credit to a buyer for use in manufacturing,
2. commercial banks processing, or reselling goods for profit. The
3. commercial paper houses instruments used in trade credit consist of the
following: (1) open-book credit, (2) trade
4. finance companies acceptance, and (3) promissory notes
5. factors, and
6. insurance company
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Short-term Sources of Funds

Supplies of Short-Term Funds. Short-term financing is provided by
the following
1. trade creditors Commercial banks are institutions which
individuals or firms may tap as source of
2. commercial banks short-term financing. Commercial banks
3. commercial paper houses grant two types of short-term loans: (1)
those which require collateral, and (2) those
4. finance companies which do not require collateral. Examples of
5. factors, and commercial banks granting short-term loans
are City Trust, Premier Bank, and Land
6. insurance company Bank.
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Short-term Sources of Funds

Supplies of Short-Term Funds. Short-term financing is provided by
the following
1. trade creditors Commercial paper houses are those that
help business firms in borrowing funds from
2. commercial banks the money market. Under this scheme, the
3. commercial paper houses business firm in need of funds issues a
commercial paper, which is a short-term
4. finance companies promissory note, generally unsecured, and
5. factors, and issued by large, established firms. The
commercial paper is sold to investors
6. insurance company through the commercial paper house.
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Short-term Sources of Funds

Supplies of Short-Term Funds. Short-term financing is provided by
the following
1. trade creditors Business finance companies are financial
institutions that finance inventory and
2. commercial banks equipment of almost all types and sizes of
3. commercial paper houses business firms. Examples of finance
companies in the Philippines are Philacor
4. finance companies Credit Corporation and Consolidated Orix
5. factors, and Leasing and Finance Corporation

6. insurance company
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Short-term Sources of Funds

Supplies of Short-Term Funds. Short-term financing is provided by
the following
1. trade creditors Factors are institutions that buy the
accounts receivables of firms, assuming
2. commercial banks complete accounting and collection
3. commercial paper houses responsibilities.' Engineering firms which
maintain sizable amounts of accounts
4. finance companies receivable may avail of the services of
5. factors, and factors when they are in dire need of cash.

6. insurance company
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Short-term Sources of Funds

Supplies of Short-Term Funds. Short-term financing is provided by
the following
1. trade creditors Insurance companies are also possible
sources of short-term funds. Industry reports
2. commercial banks indicate that insurance companies in the
3. commercial paper houses Philippines regularly make investments in
short-term commercial papers and
4. finance companies promissory notes
5. factors, and
6. insurance company
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Long-Term Sources of Funds

Long-term sources of funds are

classified as follows:
● 1. Long term debts
● 2. common stocks, and
● 3. retained earnings.
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Long-Term Sources of Funds

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, working capital,
or debt repayment." Term loans have maturities of 2 to 30 years.

The advantages 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
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Long-Term Sources of Funds

Long-term debts are sub-classified into
term loans and bonds.

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.
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Long-Term Sources of Funds

Common Stocks. The third source of long-term funds consists of

the issuance of common stocks. Since common stocks represent
ownership of corporations, many investors are placing their
money in them.
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Long-Term Sources of Funds

Retained Earnings. Retained earnings refer to "corporate earnings not paid

out as dividends. This simply means that whatever earnings that are due to
the stockholders of a corporation are reinvested. Because these retained
earnings can be used by the firm indefinitely, they become an important
source of long-term financing
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The Best Sources of Financing

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The Best Source of Financing

To determine the best source, Schall and
Haley recommends that the following
factors must be considered:" As some fund sources are less restrictive,
1. FLEXIBILITY the flexibility factor must be considered. In
2. risk general, however, short-term fund sources
3. income offer more flexibility than long-term
4. control
sources. This is so because after settling
the debt, short-term borrowers may shift to
5. timing
other types of financing. Long-term
6. other factors like collateral values,
flotation costs, speed, and exposure.
borrowers are given this opportunity only
after a longer period of waiting
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The Best Source of Financing

To determine the best source, Schall and Generally, short-term debt "subjects the
Haley recommends that the following borrowing firm to more risk than does
factors must be considered:"
financing with long-term debt."
1. flexibility
This happens because of two reasons:
2. RISK
1. short-term debts may not be renewed
3. income
with the same terms as the previous one, if
4. control
they can be renewed at all
5. timing
2. since repayments are done more often,
6. other factors like collateral values,
flotation costs, speed, and exposure. the risk of defaulting is greater
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The Best Source of Financing

To determine the best source, Schall and
Haley recommends that the following
factors must be considered:" The various sources of funds, when availed
1. flexibility of, will have their own individual effects in
2. risk the net income of the engineering firm,
3. INCOME
When the firm borrows, it must generate
enough income to cover the cost of
4. control
borrowing and still be left with sufficient
5. timing
returns for the owners.
6. other factors like collateral values,
flotation costs, speed, and exposure.
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The Best Source of Financing

To determine the best source, Schall and
Haley recommends that the following
factors must be considered:"
1. flexibility
2. risk When new owners are taken in because of
3. income the need for additional capital, the current
4. CONTROL
group of owners may lose control of the
firm. If the current owners do not want this
5. timing
to happen, they must consider other means
6. other factors like collateral values,
of financing.
flotation costs, speed, and exposure.
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The Best Source of Financing

To determine the best source, Schall and
Haley recommends that the following
factors must be considered:"
1. flexibility
2. risk The financial market has its ups and
3. income downs. This means that there are times
4. control when certain means of financing provide
5. TIMING better benefits than at other times. The
6. other factors like collateral values, engineer manager must, therefore, choose
flotation costs, speed, and exposure. the best time for borrowing or selling
equity.
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The Best Source of Financing

To determine the best source, Schall and
Haley recommends that the following
factors must be considered:"
1. flexibility There are other factors considered in determining the
best source of funds. They are as follows:
2. risk
1. Collateral values: Are there assets available as
3. income collateral?
4. control 2. Flotation cost: How much will it cost to issue bonds
5. timing or stocks?
3. Speed: How fast can the funds required be raised?
6. OTHER FACTORS LIKE
COLLATERAL VALUES, 4. Exposure: To what extent will the firm be exposed
FLOTATION COSTS, SPEED, AND to other parties?
EXPOSURE.
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The Firms Financial Health

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The Firms Financial Health

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 services, employees will
be assured of employment, suppliers will be assured of a market, etc.
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Indicators of Financial Health

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Indicators of Financial Health

The financial health of an engineering firm may be determined with the
use of 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
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Indicators of Financial Health

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Risk Management and Insurance

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Risk Management and Insurance

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 Management and Insurance

Risk refers to the uncertainty concerning loss or injury. The engineering firm is
faced with a long list of exposure to risks, some of which are follows:
1. fire
2. theft
3. floods
4. accidents
5. nonpayment of bills by customers (bad debts)
6. disability and death
7. damage claim from other parties
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Risk Management and Insurance

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.

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

gain. This type of risk is not insurable.
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Risk Management and Insurance

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 are directed towards
speculative risks that are inherent and cannot be avoided
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Risk Management and Insurance

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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Risk Management and Insurance

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
 slidesmania.com

Risk Management and Insurance

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
 slidesmania.com

Risk Management and Insurance

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
 slidesmania.com

Risk Management and Insurance

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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