MANAGING

>THE FINANCE
FUNCTION
CHAPTER 12

>THE FINANCE FUNCTION: A PROCESS FLOW

DETERMINATION
OF FUND
REQUIREMENTS

PROCUREMENT
OF
FUNDS

EFFECTIVE AND
EFFICIENT USE
OF FUNDS

DETERMINATION

OFREQUIREMENTS
FUND

CHAPTER 12

THE DETERMINATION OF FUNDS

1.
2.
3.
4.

To finance daily operations

To finance the firms credit services
To finance the purchase of inventory
To finance the purchase of major assets

FINANCING DAILY OPERATIONS

FINANCING the firms credit services

FINANCING the purchase of inventory

FINANCING THE PURCHASE OF MAJOR AsSETS

SOURCES
OF FUND
CHAPTER 12

SOURCES OF FUNDS
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 shortterm creditors.

ADVANTAGES
1. They are easier to obtain.
2. Short-term financing is often less costly.
3. Short-term financing offers flexibility to the
borrower.
DISADVANTAGES
1. Short-term credits mature more frequently.
2. Short-term debts are more costly than longterm debts

SUPPLIES OF SHORT TERM FUNDS

1. Trade Creditors
2. Commercial Banks
3. Commercial Paper House
4. Finance Companies
5. Factors
6. Insurance Companies

LONG TERM SOURCES OF FUNDS

CLASSIFICATIONS
1. Long-term debts
2. Common Stocks
3. Retained Earning

TERM LOANS
commercial or industrial loan from a
commercial bank, commonly used for plant and
equipment, working capital, or debt repayment

BONDS
It is a certificate of indebtedness issued by a
corporation to a lender

TYPES OF BONDS
1. Debentures
2. Mortgage Bond
3. Collateral Trust Bond
4. Guaranteed Bond
5. Subordinated Debentures
6. Convertible Bonds
7. Bonds with Warrants
8. Income Bonds

BEST SOURCE

OF FINANCING
CHAPTER 12

FACTORS RECOMMENDED BY
SCHALL AND HALEY:
1. Flexibility
2. Risk
3. Income
4. Control
5. Timing
6. Other factors like collateral values, flotation
costs, speed, and exposure

THE FIRMS

FINANCIAL
HEALTH

CHAPTER 12

OBJECTIVES OF ENGINEERING FIRMS

1. To make profits for the owners
2. To satisfy creditors with the repayment of
loans plus interests
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.

INDICATORS OF

FINANCIAL
HEALTH

CHAPTER 12

BALANCE SHEET

INCOME STATEMENT

STATEMENT OF CHANGE
IN FINANCIAL POSITION

RISK

MANAGEMENT
AND INSURANCE

CHAPTER 12

RISK
It refers to the uncertainty concerning loss or
injury
SOME RISKS AN ENGINEERING FIRM
CAN FACE
1. Fire
2. Theft
3. Floods
4. Accidents
5. Nonpayment of bills by customers
6. Disability and death
7. Damage claim from other parties

TYPES OF RISK
1. Pure Risk
2. Speculative Risk
RISK MANAGEMENT
an organized strategy for protecting and
conserving assets and people

METHODS OF DEALING WITH RISKS

1. The risk may be avoided
2. The risk may be retained
3. The hazard may be reduced
4. The loses may be reduced
5. The risk may be shifted

RISK RETENTION
- Is a method of handling risks wherein the
management assumes the risks
HEDGING
- Refers to making commitments on both sides
of a transaction so the risks offset each other

END