CHAPTER 12 - MANAGING THE FINANCE FUNCTION Flashcards
(99 cards)
1
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2
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is an important management responsibility that deals with the “procurement and administration of funds with the view of achieving the objectives of business
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FINANCE FUNCTION
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3 BASIC MANAGEMENT FUNCTION
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- finance function
- production
- marketing
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PROCESS FLOW OF FINANCE FUNCTION
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- ## determination of fund requirements
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DETERMINATION OF FUND REQUIREMENTS
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- to finance daily operations
- to finance firm’s credit services
- to finance the purchase of inventory
- to finance the purchase of major assets
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FINANCING DAILY OPERATIONS
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- wages and salaries
- rent
- taxes
- power and light
- marketing expense
- administrative expenses
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MARKETING EXPENSES
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advertising
entertainment
travel expenses
telephone and telegraph
stationery and printing
postage, etc.
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ADMINISTRATIVE EXPENSES
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auditing
legal
services
etc
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it is often times unavoidable for firms to extend credit to customers. if the engineering firm manufactures product, sales terms vary from cash to 90-day credit extension to customers
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FINANCING THE FIRM’S CREDIT SERVICES
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when a new chemical manufacturing firm finds difficulty in convincing distributors to carry their products, a __________ may solve the problem
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CREDIT EXTENTION
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the maintenance of adequate inventory is crucial to many firm. raw materials, supplies, and parts are needed to be kept in a storage so they will be available when needed
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FINANCING THE PURCHASE OF INVENTORY
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will require sufficient funding and this must be secured
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PURCHASE OF ADEQUATE INVENTORY
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companies, at time, need to purchase major assets. when top management decides on expansion, there will be a need to make investments in capital assets like land, plan, and equipment
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FINANCING THE PURCHASE OF MAJOR ASSET
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SOURCES OF FUNDS
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- cash sales
- collection of accounts receivables
- loans and credits
- sales of asset
- ownership contribution
- advances from customers
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cash is derived when the firm sells its product or services
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CASH SALES
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some engineering firms extend credit to customers. when these are settled, cash is made available
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COLLECTION OF ACCOUNTS RECEIVABLES
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when other source of financing are not enough, the firm will have to resort to borrowing
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LOANS AND CREDITS
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cash is sometimes obtained from the sales of company’s assets
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SALE OF ASSETS
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when cash is not enough, the firm may tap its owners to provide more money
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OWNERSHIP CONTRIBUTION
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sometimes, customers are required to pay cash advances on orders made . this helps the firm in financing its production activities
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ADVANCES FROM CUSTOMERS
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Loans may be classified as
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- short-term
- medium-term
- long-term
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are those with repayment schedules of less than one year
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SHORT-TERM SUORCES OF FUNDS
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are sometimes required by short-term creditors
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COLLATERALS
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LONG-TERM ASSETS
Production equipment
Land
Building
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ADVANTAGES OF SHORT-TERM CREDITS
1. they are easier to obtain
2. short-term financing are often less costly
3. offers flexibility to the borrower
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creditors maintain the view that the risk involved in short-term lending is also a short-term. thus short-term credits are made easily available to qualified borrowers
They are easier to obtain
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since short term financing i favored by creditors, they make it available at less cost
Often less costly
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after the borrower has settled his short-term debt, he may consider other means of financing, in contrast, eliminates, this option. he is stuck with the long-term funds even he is no longer requires it.
OFFERS FLEXIBILITY TO THE BORROWER
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DISADVANTAGES OF SHORT-TERM CREDITS
1. mature more frequently
2. at times, be more costly than longer term debts
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Supplies of short-term funds. short term financing is provide the following:
1. trade creditors
2. commercial banks
3. commercial paper houses
4. finance companies
5. factors
6. insurance companies
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refers to suppliers extending credit to a buy for use in manufacturing, processing, or reselling goods for profit
TRADE CREDITORS
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INSTRUMENTS USED IN TRADE CREDIT
1. open-book credit
2. trade acceptance
3. promissory notes
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is unsecured and permits the customer to pay for goods delivery to him in a specified number of days
OPEN-BOOK CREDIT
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is a time draft drawn by a seller upon a purchase payable to the seller as payee, and accepted by the purchaser as evidence that the goods shipped are satisfactory and that the price is due and payable
TRADE ACCEPTANCE
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is an unconditional promise in writing made by one person to another, signed by the marker, engaging to pay, on demand or fixed or determinable future time, a certain sum of money to, or to be order of, a specified person or to bearer
PROMISSORY NOTES
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are institutions which individuals or firms may tap as source of short-term financing
COMMERCIAL BANKS
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Commercial banks grant two types of short-term loans
1. those which require collateral
2. those which do not require collateral
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EXAMPLES OF COMMERCIAL BANKS GRANTING SHORT-TERM LOANS
City Trust
Premier Bank
Land Bank
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are those that help business firms in borrowing funds from the money market. under this scheme, the business firm is need of funds issues a commercial paper , which a short-term promissory note, generally unsecured, and issued by large, established firms
COMMERCIAL PAPER HOUSES
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is sold to investors through the commercial paper house
COMMERCIAL PAPER
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are financial institutions that finance inventory and equipment of almost all types and sizes of business firms
BUSINESS FINANCE COMPANIES
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EXAMPLE OF FINANCE COMPANIES IN THE PH
Philacor Credit Corporation and Consolidated Orix Leasing and Finance Corporation
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are institutions that buy the accounts receivables of firm, assuming complete accounting and collection responsibilities
FACTORS
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are also possible sources of short-term funds. industry reports indicate that insurance companies in the Philippines regularly make investments in short-term commercial papers and promissory notes
INSURANCE COMPANIES
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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.
LONR-TERM SOURCES OF FUND
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CLASIFICATION OF LONG-TERM SOURCES OF FUNDS
1. long-term debts
2. common stocks
3. retained earnings
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Long-term debts are sub-classified into
Term Loans and Bonds
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is a " commercial or industrial loan from a commercial bank, commonly used for plant and equipment, working capital, or debt repayment "
TERM LOANS
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Term loans have maturities of
2 to 30 years
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Advantages of term loans as long-term source of funds are as follows:
1. funds can be generated more quickly than other long-term sources
2. they are flexible, i.e., they can be easily tailored to the needs of the borrower
3. the cost of issuance is low compared to other long-term sources
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is a certificate of indebtedness issued by a corporation to lender. it is marketable security that the firm sells to raise funds
BONDS
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the source of long-term funds consist of issuance of common stocks. since common stocks represent ownership of corporations, many investors are placing money in them
COMMON STOCKS
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refer to corporate earnings not paid out as dividends. this simply means that whatever earnings that are due to stockholders of corporation are reinvested
RETAINED EARNINGS
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these can be used by the firm indefinitely, they become an important source of long-term financing
RETAINED EARNINGS
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TYPES OF BOND
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
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no collateral requirement
DEBENTURES
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secured by real estate
MORTGAGE BOND
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secured by stocks and bonds owned by the issuing corporation
COLLATERAL BONDS
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payment of interest or principal is guaranteed by one or more individuals or corporations
GUARANTEED BOND
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with an inferior claim over other debts
SUBORDINATED DEBENTURES
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convertible into shares of common stock
CONVERTIBLE BONDS
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warrants are options which permit the holder to buy stock of the issuing company at a stated price
BONDS WITH WARRANT
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pays interest only when earned
INCOME BONDS
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BEST SOURCES OF FUNDING
1. flexibility
2. risk
3. income
4. control
5. timing
6. other factors like collateral values, flotation cost, speed and exposure
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is the prohibition on the issuance of additional debt instruments by borrower
RESTRICTION
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refers to the chance that the company will be affected adversely when a particular source of financing is chosen
RISK
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"subjects the borrowing firm to more risk than does financing long-term debt"
SHORT-TERM DEBT
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the various sources of funds, when availed of, will have their own individual effects in the net income of the engineering firm
INCOME
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when new owner are taken in because of the need for additional capital, the current group of the owner may lose control of the firm
CONTROL
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the financial market has its up and downs
TIMING
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OTHER FACTORS
1. Collateral values
2. Flotation cost
3. Speed
4. Exposure
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are there assets available as collateral
COLLATERAL VALUES
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how much it will cost to issue bonds or stocks
FLOTATION COST
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how fast can the funds required to be raised
SPEED
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to what extent will the firm be exposed to other parties
EXPOSURE
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3 BASIC FINANCIAL STATEMENT
1. Balance sheet
2. Income Statement
3. Statement of changes in financial position
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is a very important concept that the engineer manager be familiar with. it confront people everyday
RISK
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LIST OF EXPOSURE TO RISK
1. fire
2. theft
3. floods
4. accidents
5. nonpayment of bills by customers (bad debts)
6. disability and death
7. damage claim form other parties
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CLASSIFICATION OF RISK
1. pure risk
2. speculative
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is one in which " there is only a chance of loss" this means that there is no way of making gains. are insurable and may be covered by insurance
PURE RISK
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is one in which there is a chance of either loss or gain, thus type of risk is not insurable. an example is investment in common stocks
SPECULATIVE RISK
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is designed to deal with pure risks, while the application of sound management practices are directed towards speculative risks that are inherent and cannot be avoided
RISK MANAGEMENT
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METHODS OF DEALING WITH RISK
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 ma be shifted
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is a method of handling risk where in the management assumes the risk
RISK RETENTION
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a planned risk retention , also called ___________, is a conscious and deliberate assumption of a recognized risk
SELF-INSURANCE
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may be reduced by simply instituting appropriate measures in a variety of business activities
HAZARDS
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EXAMPLES OF EFFORTS ON LOSS REDUCTION
1. physically separating buildings to minimize losses in case of fire
2. using fire roof materials on interior building construction
3. storing inventory in several locations to minimize losses in case 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 travelling together
7. limiting legal liabilities by forming several separate corporations
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another method of handling risk
RISK SHIFTING
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EXAMPLE OF RISK SHIFTING
hedging,
subcontracting,
incorporation, and
insurance
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refer to making commitments on both sides of a transaction so the risk offset each other
HEDGING
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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
In a corporation
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EXAMPLES OF INSURANCE PRODUCTS SOLD BY A COMPANY
-Fire
-Marine
- Casualty
- Engineering
- Aviation
-Bonds
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FIRE
fire and applied perils, business interruption
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MARINEcash in transit
hull insurance, shipowner's liability insurance protection and indemnity
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CASUALTY
motorcar, property floater, personal accident, comprehensive general liability, money, security, and payroll, cash in transit, burglary
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ENGINEERING
Contractor's all risk,
Machinery breakdown,
Contractor's plant and equipment all risk,
Erector's all risk,
Boilers and explosion,
Electronic insurance
Consequential losses
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AVIATION
Hull and liabilities insurance,
Airport operation liability,
Hangarkeeper's liability,
Aircraft refueling liability,
Pilot's licensure insurance,
Pilot/ Crew personal accident cover
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BONDS
all kinds of bonds
