MANAGING THE FINANCE

FUNCTION
GROUP 2
 Members:
Camanzo, Eriz Kaye Centeno, Kenneth
Paynor, Ayessa Nicole Peneyra, Christian Brandon
Juliano, Brian Keille Ubando, Joshua
Nocalan, Jemar Rueda, Mark Joshua
Viterbo, Ella Angelika
Camanzo, Eriz Kaye
 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're needed, how to procure them, and how to effectively and efficiently use them.

Classification of Financial Function

1. Long-term Finance: 3 years or more
2. Medium-term Finance: 1 to 3 years
3. Short-term Finance: below one year
 A Process Flow
DETERMINATION OF FUNDS REQUIREMENT

PROCUREMENT OF FUNDS

EFFECTIVE AND EFFICIENT USE OF FUNDS

The Determination of Fund Requirements
Any organization, including the engineering firm, will need
funds for the following specific requirements:

1. To finance daily operations – finance the day-to-day operations

2. To finance the firm’s credit service – finance the credit arrangement
3. To finance the purchase of inventory – finance the stocks and supplies
4. To finance the purchase of major assets – finance expansions
Viterbo, Ella Angelika
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
6. Administrative expenses
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.
Financing the Purchase of Inventory
The maintenance of adequate inventory is crucial to
many firms. The Purchase of adequate inventory, however,
will require sufficient funding and this must be secured.
Financing the Purchase of Major Asset
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.
Centeno, Kenneth
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
 Short-Term Sources of Funds
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

1. They are easier to obtain.
2. Short-term financing is often less costly.
3. Short-term financing offers flexibility to the borrower.
Disadvantages of Short-Term Credits
4. Short-term credits mature more frequently.
5. Short-term debts may, at times, be more costly than long-term debts.
Juliano, Brian Keille
Supplies of Short-Term Funds
1. Trade creditors
2. Commercial banks
3. Commercial paper houses
4. Finance companies
5. Factors, and
6. Insurance companies
Long-terms 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 source to be used

Long-term sources of funds are classified as follows:

1. Long-term debts
2. Common stocks, and
3. Retained earning
Long-term debts are sub-classified into term
loans and bonds.
Term Loans.
A 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

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.
Nocalan, Jemar
TYPES OF BONDS
1. Debentures- no collateral requirement
2. Mortgage bond- secured by real estate
3. Collateral Trust bond- secured by stocks and bonds owned by the issuing
corporation
4. Guaranteed Bond- payment of interest or principal is guaranteed by one or more
individuals or corporations
5. Subordinated Debentures- with an inferior claim over other debts
6. Convertible Bonds- convertible into shares of common stock
The Best Source of Financing
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 the following factors
must be considered
1. Flexibility
2. Risk
3. Income
4. Control
5. Timing
6. Other factors like collateral values, flotation costs, speed, and exposure
1. Flexibility
Some fund sources impose certain restrictions on the
activities of the borrowers. An example of a restriction is the
prohibition on the insurance of additional debt instruments
by the borrower.
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. When the firm borrows, it must generate
enough income to cover the cost of borrowing and still be
left with sufficient returns to the owners.
Paynor, Ayessa Nicole
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. If the current
owners do not want this to happen, they must consider
other means of financing.
5. Timing
The financial market has its ups and downs. This
means that there are times when certain means of
financing provide better benefits than other times. The
Engineer manager must therefore, choose the best time
for borrowing or selling equity.
The Firm’s 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 and services, employees will be
assured of employment, suppliers will be assured of a market, etc.
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 of operations;
3. Statement of changes in financial position
Rueda, Mark Joshua
Risk Management and Insurance
Risk
Risk refers to the uncertainty concerning loss or injury. Risk is a very important concept that
the engineer manager must be familiar with.

The engineering firm is faced with a long list of exposure to risk, some of which are as follows:
1. Fire
2. Theft
3. Floods
4. Accidents
5. Bad debts
6. Disability and death
7. Damage claim from other parties
Types of Risk
Pure - there is only a chance of loss.
Speculative- there is a chance of either loss or gain
Peneyra, Christian
Brandon
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.
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
Example of risk shifting
A. Hedging- refers to making commitments on both sides of a transaction so the risks affect each other.

B. Subcontracting- when a contractor is confronted with a contract bigger than his company's capabilities,
he may invite subcontractors in so that some of the risks may be shifted to them.

C. Incorporation - 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 the management. The liability of
the stockholder is limited to his capital contribution.

D. Insurance - to shift risk to another party,a company buys insurance. When a loss occurs, the company is
reimbursed by the insurer for the loss incurred subject to the term of the insurance policy.