Copy of MANAGING THE FINANCE FUNCTION

Finance Function

The Firm's Finances and Cash Flow

The Sources of Funds

CUSTOMERS

TYPE OF BONDS

FEATURES

What the Finance Function is

LONG-TERM FINANCING

Long-Term debt

Common stock

Retained earnings

LONG-TERM ASSETS

Production

Equipment

Land

Buildings

1. Cash Sales

2. Collection of Accounts Receivables

3. Loans and Credits

4. Sales of Assets

5. Ownership contribution

6. Advances from customers

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".

SALES

ACCOUNTS

RECEIVABLE

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

no collateral requirement.

secured by real state.

secured by stocks and bonds

owned by the issuing corporation.

payment of interest or principal is

guaranteed by one or more

individuals or corporations.

with an inferior claim over other

debts.

convertible into shares of

common stock.

warrants are options which permit

the holder to buy stock of the issuing

company at a stated price.

pays interest only when earned.

INVENTORY

CASH

Marketable

Securities

Supplies

Materials

The Finance Function:

A Process Flow

Taxes

Salaries

Wages

Rents

Insurances

SHORT-TERM FUND SOURCES

Commercial Banks

Commercial Paper Houses

Finance Companies

Factors

Insurance Companies

Short-Term Sources of Funds

DETERMINATION

OF FUND

REQUIREMENTS

1. short-term

2. long-term

The Determination of Fund Requirements

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.

1. short-term

2. long-term

PROCUREMENT

OF

FUNDS

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

Disadvantages of Short-Term Credits

EFFECTIVE

AND

EFFICIENT

USE OF

FUNDS

1. short-term

2. long-term

1. Short-Term credits mature more frequently.

2. Short-Term debts may, at times, be more

costly than Long-Term debts.

THE FIRM'S FINANCIAL HEALTH

Supplies of Short-Term Funds

Financing Daily Operations

THE BEST SOURCE OF FINANCING

1. Trade creditors

2. Commercial banks

3. Commercial paper houses

4. Finance companies

5. Factors, and

6. Insurance companies

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 costumers 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.

1. wages and salaries

2. rent

3. taxes

4. power and light

5. marketing expenses

6. administrative expenses

1. Flexibility

2. Risk

3. Income

4. Control

5. Timing

6. Other factors

Long-Term Sources

of Funds

Classifications:

1. Long-Term debts

2. Common Stocks

3. Retained Earnings

Examples of Efforts on Loss Reduction

INDICATORS OF FINANCIAL HEALTH

TYPE OF RISK

Pure Risk

1. Balance Sheet

2. Income Statement

3. Statement of changes in

financial position

- is one in which "there is only a chance of loss".

This means that there is no way of making gains

with pure risks.

1. physically separating buildings to minimize

losses in case of fire;

2. using fire proof materials on interior building

construction;

3. storing inventory in several locations to mini-

mize losses in cases of fire and theft;

4. maintaining duplicate records to reduce accounts

receivable losses;

5. transporting goods in separate vehicles instead of

concentrating high values in single shipments;

6. prohibiting key employees from traveling toge-

ther; and

7. limiting legal liability by forming several separate

corporations.

Speculative Risk

- is one in which "there is a chance of either loss

or gain". This type of risk is not insurable.

RISK MANAGEMENT AND INSURANCE

Risk defined

What is Risk Management

Methods of Dealing with Risk

Risk refers to the uncertainty concerning loss or

injury. The engineering firm is faced with a long

list of exposure to risk, some of which are as

follows:

• fire
• theft
• floods
• accidents
• nonpayment of bills by customers(bad debts)
• disability and death
• damage claim from other parties

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.

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 available methods of dealing with risk in order to secure the economic survival of the firm."

Thank you for your attention!