BSCE 4A

Group 3

 The Determination Of Fund Requirements

 Source Of Funds
 The Best Source Of Financing
 The Firms Financial Health
 Indicators Of Financial Health
 Risk Management And Insurance

What the finance function is?

The finance function is an important management responsibility that deals the
“procurement and administration of funds with the view of achieving the objectives of
the business.
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

The Source 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. Cash is derived when the firm sells its products or services.
2.Collection Of Accounts Receivables. Some engineering firms extend credits 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 the resort to borrowing.
4.Sales 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.
 Short- term sources of funds

Loans and credits may be classified as short-term or long-term. Short-term sources

of funds are those with repayment schedules of less than 12 months while long term
sources require more than 12 months.

Advantage of short-term credits

•Easy to obtain
•Often less costly
•Offers flexibility to the borrower

Disadvantages of short-term credits

•Mature more frequently
•May at times, be more costly than long-term debts

Supplies of short-term funds

•Trade creditors
•Commercial banks
•Commercial paper houses
•Finance companies
•Factors
•Insurance companies

Long-term sources of Funds

•Term loans
•Common stocks
•Bonds
•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.

Common stocks
A security that represents ownership in a corporation. Holders of common stock
exercise control by electing a board of directors and voting on corporate policy.
Common stockholders are on the bottom of the priority ladder for ownership structure.
In the event of liquidation, common shareholders have rights to a company’s assets
only after bondholders, preferred shareholders and other debt holders have been paid
in full.
Bonds
 A bond is certificate of indebtedness issued by a corporation to a lender. It is a
marketable security that the firm sells to raise funds.
Retained earnings
Corporate earnings not paid out as dividends. This simply means that whatever
that are due to the stockholders of a corporation reinvested.

Factors in Determining the Best Sources of Financing

As there are various fund sources, the engineer manager, or whoever is charge,
must determine which source is the best available for the firm. Factors to consider
include:
•Flexibility
•Risk
•Income
•Control
•Timing
•Other factors

1. Flexibility- some fund sources impose certain restriction on the activities of the
borrowers.
2. 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.
4. Control- when new owner are taken in because of the need for additional capital,
the current group of the owners may lose control of the firm.
5. Timing- this means that there are times when certain means of financing provide
better benefits than at other times.
6. Other factors like collateral values flotation cost, speed, and exposure.

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

•Balance sheet- also statement of financial position

•Income statement- also called statement of operations;
•Statement of changes in financial position
 Risk Management and Insurance

The engineer managers, especially those at the top level, are entrusted with the
functions 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.
Risk confront people every day. Companies are exposed to them. Newspapers report on
daily basis the destruction of life and property. Companies that could not cope with losses
are forced to shut down.

Risk
Risk refers to uncertainly concerning loss or injury. Here, engineering firm is
faced with a long list of exposure to risks, some of which are as follows:
 Fire
 Theft
 Floods
 Accident
 Nonpayment of bills by costumers(bed debts)
 Disability and death
 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 while speculative risk results in an uncertain degree of
gain or loss. All speculative risks are made as conscious choices and are not just a
result of uncontrollable circumstances.

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

1. The risk may be avoided

2. The risk may be retained
3. The hazard mat be reduced
4. The losses may be reduced
5. The risk may be shifted