CHAPTER 6: MANAGING THE FINANCE FUNCTION

Question 1

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

Answer 1

The Finance Function

Question 2

a sum of money saved or made available for a particular purpose

Answer 2

Fund

Question 3

The Finance Function (Process Flow)

Answer 3

1. Determination of Fund
   Requirements
2. Acquisition of Funds
3. Effective and Efficient
   Use of Funds

Question 4

Determination of Fund
Requirements

Answer 4

1. Financing Daily Operations
2. Financing the Firm’s Credit Services
3. Financing the Purchase of Inventory
4. Financing the Purchase of Major Asset

Question 5

The day-to-day operation of the engineering firm will require funds to take care of expenses as they come.

Answer 5

Financing Daily Operations

Question 6

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.

Answer 6

Financing the Firm’s Credit Services

Question 7

Raw materials, supplies, and parts are needed to be kept in storage so they will be available when needed.

Answer 7

Financing the Purchase of Inventory

Question 8

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.

Answer 8

Financing the Purchase of Major Asset

Question 9

Acquisition of Funds: Sources

Answer 9

• Cash Sales
• Collection of Accounts Receivables
• Loans and Credits
• Sale of Assets
• Ownership Contribution
• Advances from Customers

Question 10

Finance Classification

Answer 10

a) Long Term Finance
b) Medium Term Finance
c) Short Term Finance

Question 11

This includes finance of investment of 3 years or more;
sources include owner capital, share capital, long-term loans, internal funds and so on.

Answer 11

Long Term Finance

Question 12

This is financing done between 1 to 3 years, this can be sourced from bank loans and financial institutions.

Answer 12

Medium Term Finance

Question 13

This is finance needed below one year;
funds may be acquired from bank overdrafts, commercial paper, advances from customers, trade credit etc.

Answer 13

Short Term Finance

Question 14

Factors in Determining the Best Sources of Financing

Answer 14

1. Flexibility
2. Risk
3. Income
4. Control
5. Timing
6. Other Factors

Question 15

Some fund sources impose certain restriction on the activities of the borrowers. (e.g. prohibition on the issuance of additional debt instruments by the borrower)

Answer 15

Flexibility

Question 16

refers to the chance that the company will be affected adversely when a particular source of financing is chosen.

Answer 16

Risk

Question 17

When the firm borrows, this must be generated to cover the cost of borrowing and still be left with sufficient returns for the owners.

Answer 17

Income

Question 18

When new owners are taken in because of the need for additional capital, the current group of owners may lose control of the firm

Answer 18

Control

Question 19

There are times when certain means of financing provide better benefits than at other times. The engineer manager must, therefore, choose the best time for borrowing or selling equity.

Answer 19

Timing

Question 20

collateral values, floatation cost, speed, exposure

Answer 20

Other Factors

Question 21

Objectives of Engineering Firms

Answer 21

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

Question 22

3 Basic Financial Statements

Answer 22

1. Balance Sheet
2. Income Statement
3. Statement of Changes in Financial Position

Question 23

is a very important concept that everybody must be familiar with; refers to the uncertain loss or injury.

Answer 23

Risk

Question 24

Types of Risks

Answer 24

1. Pure Risk
2. Speculative Risks

Question 25

there is no way of making gains (e.g. Theft)

Answer 25

Pure Risk

Question 26

there is a chance of loss or gains (e.g. investments in common stocks)

Answer 26

Speculative Risks

Question 27

is an organized strategy for protecting and conserving assets and people.

Answer 27

Risk Management

Question 28

Methods of Dealing with Risk

Answer 28

1. The risk may be avoided 2. The hazard may be reduced 3. The losses may be reduced 4. The risk may be shifted