EM 101 Module 9

by: Engr. Francisco L. Carbon Jr.

Managing Production/Service Operations, Marketing and Finance Functions

Production/Service Operations
Organizations are designed mainly to produce products or services. If these organizations must survive and
grow, the operations function must be undertaken in the most economical manner possible. As most companies are
expected to make profits, any activity, including thosefor operations must be managed to contribute to the
accomplishment of such objectives.
WHAT OPERATIONS IS
Operations refers to "any process that accepts inputs and uses resources to change those inputs in useful ways.
The inputs include land, labor, capital, and entrepreneurship. The transformation process converts the inputs into final
goods or services.
INPUTS TAANSFOR\4A-ION OUTPUTS
PROCESS

Land
Lab01 tquipmtnt
PrOQOd1.rcc Prod~cts
Clpital ---7 Services
Eriht1Jno111:1u•::;f1i~
TecmotOQY

Examples of final goods and services are as follows:

1. Industrial chemicals like methylene chloride, borax powder, phosphoric acid, etc., which are produced by
chemical manufacturing firms;
2. Service like those for the construction of ports, high-rise buildings, roads, bridges, etc., which are produced by
constructions firms;
3. Electrical products like transformers, circuit breakers, switch gears, power capacitors, etc., which are produced by
electrical manufacturing firms;
4. Electronic products like oscilloscope, microwave tests systems, transistors, cable testers, etc., which are produced
by electronics manufacturing firms;
5. Mechanical devices like forklifts, trucks, loaders, etc., which are produced by manufacturing firms
6. Engineering consultancy services like those for construction management and supervision, project management
services, etc., which are produced by engineering consultancy firms.
WHAT OPERATIO NS MANAGEMENT IS
Operations is an activity that needs to be managed by competent persons. Aldag and Stearns accurately defined
operations management as "the proee~ ofp:l-anning, -organizing; and controlling operations to- reach objectives efficiently
and effectively.
Efficiency is related to "thecost of doing something, or the resource utilization involved ...When a person
performs a job at lesser cost than when another person performs the same job, he is more efficient than the other person.
Effectiveness refers to goal accomplishment. When one is able to reach his objectives, say produce 10,000 units
in one month, he is said to be effective.
Operations management must be performed in coordination with the other functions like those for marketing and
finance. Although the specific activities of the operations divisions of firms slightly differ from one another, the basic
function remains the same, i.e., to produce products or services.
OPERATIONS AND THE ENGINEERMANAGER
The engineer manager is expected to produce some output at whatever management level be is. Ifhe is assigned
as the manufacturing engineer, his function is "to determine and define the equipment, tools, and pro- cessestl equired to
convert the design of the desired product into reality in an efficient manner."
The engineer in charge of operations in a construction firm is responsible for the actual construction of whatever
bridge or road his company has agreed to put up.He is required to do it using the least-expensive and the easiest methods.
The engineer, asoperations manager, must find ways to contribute to the production of quality goods or services
and the reduction of costs in his department.The typical operations manager is one with several years of experience in the
operations division and are an academic background in engineering.
TYPES OF TRANSFORMATION PROCESS
The engineer manager must have some knowledge of the various types of transformation process. They are as follows:
I . Manufacturing processes
a. job shop
b. batch flow
c. worker-paced line flow
d. machine-paced line flow
e. batch/continuous flow hybrid
f. continuous flow
.:;: Service processes
a. service factory
b. service shop
c. mass service
d professional service
MANUFACTURING PROCESSES
Manufacturing processes are those that refer to the making of products by hand or with machinery.
Job Shop. A job shop is one whose production is "based on sales orders for a variety of small lots.""Job shops
are very useful components of the entire production effort, since they manufacture products in small lots that are needed
by, but cannot be produced economically by manycompanies. Depending upon the customer's needs, a job shop may
produce a lot consisting of 20 to 200 or more similar parts.
Job shops produce custom products, in general. Products may be manufactured within a short notice. The
equipment used are of the general purpose type.
The type of layout used by job shops is the process layout, where similar machines are grouped together. The
typical size of operation is generally small. Job shops are labor intensive and machines are frequently idle. The next
figure shows a process flow diagram for a job shop.

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Batch F1ow. The batch flow process is where lots of generally own designed products are manufactured. It is
further characterized by the following:
1. There is flexibility to produce either low or high volumes.
2. Not all procedures are performed on all products.
3. The type of equipment used are mostly for general purpose.
4. The process layout is used.
5. The operation I slabor intensive, although there is lessm achine idlmess.
6. The size of operation is gmerallymedium-sized.
Examples of factories using the large batch flow are wineries, scrap-metal reduction plants, and road-repair
contractors.

Worker.Paced A'isemb/y Line. An assembly line refersto a production layout arranged in a sequence to
accommodate processing of large volumes of standardized products or services.
The qualiy and quantity of output in a worker-paced assembly line depends to a great extent to the skill of the
labor utilized. Examples of worker-paced assembly lines are food marts like McDonalds and Shakeys
The worker-paced assembly line is characterized bythe following:
1. The products manufactured are mostly standardized
2. There is a clear process pattern.
3. Specialized equipment is used
4. The size of operation is variable.
5. The process is worker-paced.
6. The type of layout used is the line flow.
7. Labor is still a big cost item.

Example ofa worker-paced assembly line

StallOn 2 Stt.n~ Staton 4

WttAmls Mate · 1$ ~acr
!l"' rnateno'~ 4
~ u::;tomori
--+ andlo ~ and/er 1dlo
lab:>r labor labor

Machine Paced Assembly Line. This type of production process produces mostly standard products with ·
machines playing a significant role. Among its otherfeatures are as follows:
1. The process is of clear, rigid pattern
2. Specialized type of equipment is used.
3. The line flow layout is used.
4. Capital equipment is a bigger cost item than labor.
5. Operationislarge.
6. Theprocessismachine-paced.
Examplesofmachinepaced assembly line are automobile manufacturers like General Motors and
Ford Motors.
ContinuousFlow. Thecontinuousflowproces5ingischaracterizedby"therapidrateatwhichitemsmove through
the system." This processing method is very appropriate for producing highly standardized productslike
calculators, typewriters, automobiles, televisions, cellular phones, etc.
Its other characteristics are as follows:
1. There is economy of scale in production, resulting to low per unit cost of production
2. The process is clear and very rigid.
 3. Specialized equipment are used.
4. The line flow layout is used.
5. Operations are highly capital intensive.
6. The size of opc:rntions is very large.
7. Processing is fast.

Batch/Continuous Flow Hybrid. This method of processing is a combination of the batch and the
continuous flow. Two distinct layouts are used, one for batch and one for the continuous flow. The typical
size of operation is also very large giving opportunities for economies of scale.
Examples of companies using the batch/continuous flow hybrid are breweries, gelatin producers, and
tobacco manufacturers. A simplified production process of a Gelatin Manufacturing Company using the
batch/continuous flow hybrid is shown as follows:

Service Processes
Service processes are those that refer to the provision of services to persons by hand or with
machinery.
Service Factory. A service factory offers a limited mix of services which results to some economies of
scale in operations. This also affords the company to compete in terms of price and speed of producing the
service.
The process layout preferred by the service factory is the rigid pattern of line flow processing.
McDonalds and Shakeys are also examples of service factories .

Service Shop. A service shop provides a diverse mix of services. The layout used are those for job
shops or fixed position and are adaptable to various requirements.
Service shops abound throughout the Philippines. Examples are Servitek and Megashell . Among the
services provided by these shops are car engine tune-up, wheel balancing, wheel alignment, change oil, etc.

Mass Seruice. A mass service company provides services to a large number of people simultaneously.
A unique processing method is therefore, necessary to satisfy this requirement. 'To be able to serve many
people, mass service companies offer limited mix of services.
The process layout used is typically fixed position where customers move through the layout.

Professional Services. These are companies that provide specialized services to other firms or individuals.
Examples of such firms are as follows .•
1 Engineering or management consulting services which help in improving the plant layout or the efficiency of a
company.
2. Design service which supply designs for a physical plant, products, and promotion materials.
3. Advertising agencies which help promote a firm's products.
4. Accounting services.
5. Legal services.
6. Data processing services.
7. Health services.

Professional service firms offer a diverse mix of services. There is a lower utilization of capital equipment
compared to the service factory and the service shop. The process pattern used is very loose. The process layout used is
identical to the job shop.
Professional service firms are, oftentimes, faced with delivery problems brought about by nonuniform demand.
Strategies that may be used ·depending on the situation are as follows :
1. The use of staggered work-shift schedules.
2. The hiring of part-time staff.
3. Providing thecustomer with opportunity to select the level of service.
4. Installing auxiliary capacity or hiring subcontractors.
5. Using multi skilled floating staff.
6. Installing customer self-service.

IMPORTANT PARTS OF PRODUCTIVESYSTEMS

Productive systems consist of six important activities as follows:
1. product design
2. production planning and scheduling
3. purchasing and materials management
4. inventory control
5. work flow layout
6. quality control
ProductDesign
Customersexpectthattheproductstheybuywouldperformaccordingtoassi.gnedfunctions .A~odproductdefigna
ssuresthatthiswillbeso.Customersavadbuyingproductswithpoorproductdesign.Anexampleisthatw:tainbrandofballpe
nwhichfailstowriteafteroneortwodaysofactualuse.Thishappensbecauseofpoorproductdesign.
Productdesignrefersto''therrocessofcreatingaretofproductspeci.ficationsaprropriatetothedemandsofthesi.tuati
on.
Companieswantingtomaintainorimproveitsmar·ket&iarekeepsaproductdesignteamcomposedofengineers,manufa
cturing,andmarketingspeciafuts.

Production Planning and Scheduling

Production planning may be defined as "forecasting the future sales of a given product, translating this fore-cast
into the demand it generates for various production facilities, and arranging for the procurement of these facilities.""
Production planning is a very important activity because it helps management to make decisions regarding
capacity. When the right decisions are made, there will be less opportunities for wastages.
Scheduling is the "phase of production control involved in developing timetables that specify how long each
operation in the production process takes." 12 Efficient scheduling assures the optimization of the use of human and
nonhuman resources.

Purchasing and Materials Management

Firms need to purchase supplles and materials re-quired in the various production activities. The management of
purchasing and materials must be undertaken with a high degree of efficiency and effectiveness specially in finns
engaged in high volume production. The wider variety of supplies and materials needed adds to the necessity of proper
managing and purchasing of materials.
Materials manage ent refers to "the approach that seeks efficiency of operation through integration of all
material acquisition, movement, and storage activities in the firm"

Inventory Control
Inventory control is the process of establishing and maintaining appropriate levels ofreserve stocksof goods."
supplies and materials are required by firms in the production process, these must bekeptavailablewhen they are
needed. Too much reserves of stocks will penalize the firm in terms of high storage costs and other related risks like
obsolescence and theft. Too little reserves, on the other hand, may mean Just income opporbmities if production
activities arehampered. Abalance between the two extremes must be determined.There are waysof achieving proper
inventory control. They are as follows:
1. determining reorder point and reorder quantity
2. determining economic order quantity
3. the useofjust-in-time (IlT) method of inventory control
4. the use of the material requirement planning (MRP)method of planning and controlling inven-tories.

Work-Flow Layout
Work-flow layout is the process of determining the physical arrangement of the production system. In the
transformation process, the flow of work may be done either haphazardly or orderly.
The job of the operations manager is to assure that a cost-effective work-flow layout is installed. Agood work-
flow layout will have the following benefits:"
1. Minimize investment in equipment.
2. Minimize overall production time.
3. Use existing space most effectively.
4. Provide for empoyee convenience, safety, and comfort.
5. Maintain flexibility of arrangement and operation.
6. Minimize material handling cost.
7. Minimize variation in types of material-handling equipment.
8. Facilitate the manufacturing(or ~rvice)process.
9. Facilitate the organizational structure.

Quality Control
Quality control refers to the measurement of products or ~rvices against standards set by the company. Certain
standard requirements are maintained by the management to facilitate production and to keep customers satisfied.
Poor quality control breeds customer complaints, returned merchandise, expensive lawsuits, and huge
promotional expenditures.
MARKETING FUNCTION

WHAT IS THE MARKETING CONCEPT?

Marketing is a group of activities designed to facilitate and expedite the selling of goods and services. The
marketing concept states that the engineer must try to satisfy the needs of his clients by means of a set of coordinated
activities. When clients are satisfied with what the company offers, they continually provide business

THE ENGINEER AND THE FOUR P'S OF MARKETING

The engineering organization will be able to meet the requirements of its clients (or customers) depending on how it uses
the four P's of marketing which are as follows :
1 . the product (or service)
2. the price
3. the place, and
4. the promotion.
5.
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hG M rketing
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Product
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of the
Pl ce

lEr.91100·
11 ger
P oMOtirin

The Product
In the marketing sense, the term product" includes the tangible (or intangible) item and its capacity to-satisfy a
specific need. When a customer buys a car, he is actually buying the comfortable ride he anticipates to derive from the
car. This is not to mention the psychological benefits attached to the ownership of a car.
The services provided by the engineer manager will be evaluated by the client on the basis of whether or not his
or her exact needs are met. When a competitor comes into the picture and sells the same type of service, the pressure to
improve the quality of services sold will be felt. When improvement is not possible, "extras" or noses" are given to
clients. An example is the construction company that provides "free estimates" on whatever inquiries on construction are
received.

The Price
Price refers to •the money or other considerations exchanged for the purchase or use of the product, idea, or
service." Some companies use price as a competitive tool or as a means to convince the customer to buy.
When products are similar in quality and other characteristics, price will be a strong factor on whether or not a sale will
be made. This does not hold true, how- ever, in the selling of services and ideas. This is because of the uniqueness of
every service rendered or every idea generated.
When a type of service becomes standardized, price can be a strong competitive tool. When a construction finn,
for instance, charges a flat 10 percent service fee for all of its construction services, a competitor may charge a lower
rate. Such action, however, will be subject to whether or not the industry will allow such practice.

The Place
If every factor is equal, customers would prefer to buy from firms easily accessible to them. If time is of the
essence, the nearest firm will be patronized.
It is very important for companies to locate in places where they can be easily reached by their customers. Not
every place is the right location for any company.
When a company cannot be near the customers, it uses other means to eliminate or minimize the effects of the
problem. Some of these means are:
1. hiring sales agents to cover specific areas;
2. selling to dealers in particular areas;
3. establishing branches where customers are located;
4. establishing franchises in selected areas.
Manufacturing companies can choose or adapt all of the above-mentioned options. Service companies like construction
firms adapt the modified versions. An example is the engineer manager of a construction firm who gives commissions to
whoever could negotiate a construction contract for the firm.

The Promotion
When engineer managers have products or services to sell, they will have to convince buyers to buy from them.
Before the buyer makes the purchasing decision, however, he must first be infonned, persuaded, and influenced. The
activity referred to in this case, is called promotion.
McCarthy and Perreault define promotion as "com-municating information between seller and potential buyer to
influence attitudes and behavior."
There are promotional tools available and the engineer manager must be familiar with them if he wants to use them
effectively. These tools are as follows :
1 advertising
 2 publicity
3. personal selling
4 sales promotion
Aduertising. Nylen defines advertising as "a paid message that appears in the mass media for the purpose of informing or
persuading people about particular products, services, beliefs, or action.'" The mass media referred to include television,
radio, magazines, and newspapers. If the engineering manager wants to reach a large number of people, he may use any
of the mass media depending on his specific needs and his budget. Each of the public advertising carriers, i.e., radio,
television, magazines, and newspapers, has their own specific audiences and careful analysis must be made if the
engineering manager wants to pick the right one.

Publicity. The promotional tool that publishes news or information about a product, service, or idea on behalf. of a
sponsor but is not paid for by the sponsor is called publicity.• The mass media is also the means used for publicity. If the
engineer manager knows how to use it, publicity is a very useful promotional tool. His message may be presented as a
news item, helpful information, or an announcement.

Personal Selling. A more aggressive means of pro-moting the sales of a product or service is called personal selling. It
refers to the "oral presentation in a conversa-tion with one or more prospective purchasers for the purpose of making a
sale."'
Personal selling may be useful to the marketing efforts of the engineer manager. If, for instance, he is the general
manager of a firm manufacturing spare parts, he may assign some employees to personally seek out spare parts dealers
and big trucking companies to carry their product lines.
Sah Promotion. Any paid attempt to communicate with the customers other than advertising, publicity, and personal
selling, may be considered sales promotion . This includes displays, contests, sweepstakes, coupons, trading stamps,
prizes, samples, demonstrations, referral gifts; etc.
Contests and sweepstakes are very popular sales promotion tools

STRATEGIC MARKETING FOR ENGINEERS

Companies, including those managed by engineer managers, must serve markets that are best fitted to their capabilities.
To achieve this end, a very important activity called strategic marketing is undertaken.
Under this set-up, the following steps are made:
1. selecting a target market
2. developing a marketing mix
Selecting a Target Market
A market consists of individuals or organizations, or both, with the desire and ability to buy a specific product or
service. To maximize sales and profits, a company bas the option of serving entirely or just a portion of its chosen
market. Within markets are segments with common needs and which will respond similarly ·to a marketing action.
An analysis of the various segments of; the chosen market will help the company make a decision on whether to serve all
or some of the segments. The segment or segments chosen become the target market. In selecting a target market, the
following steps are necessary:
1. Divide the total market into groups of people who have relatively similar product or service needs.
2. Determine the profit potentials of each segment.
3. Make a decision .on which segment or segments will be served by the company.
A smaller company may find it most profitable to supply only the construction material needs of the residential segment.
A bigger company, however, may find it more profitable to perform actual construction in addition to selling
construction materials.

Factors Used in Selecting a Target Market. A target market must have the ability to satisfy the profit objectives of the
company. In seleeting a target market, the following factors must be taken into consideration:
1. the size of the market, and
2. the number of competitors serving the market.
The total demand for the product or service in a given area must be determined first if the company wants to
serve that particular market. If there are existing businesses serving the market, the net demand must be considered.

Developing a Marketing Mix

After the target market bas been identified, a marketing mix must be created and maintained. The marketing mix
consists of four variables :the product, the price, the promotion, and the place (or distribution).
Given a marketing environment, the engineer man- ager can manipulate any or all variables to achieve the
company's goals. As such, the quality of the product may be enhanced, or the selling price made a little lower, or the
promotion activity made a little more aggressive, or a wider distribution area may be covered. Any or all of the foregoing
may be undertaken as conditions warrant.

FINANCE FUNCTION
WHAT THE FINANCE FUNCTION IS
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."' If the engineer manager is running the
finn as a whole, he must be concerned with the determination of the amount of funds required, when theyare needed,
how to procure them, and how to effectively and efficiently use them.
 In the performance of his duties, the engineer man- ager, at whatever management level he is, must do hls share
in the achievement of the financial objectives of the company.
THE DETERMINATION OF FUND REQUIREMENTS
Any organization, including the engineeringfirm, will need funds for the following specific requirements :
I . to finance daily operations
2. to finance the firm's credit services
3. to fmance the purchase of inventory
4. tofinancethepurchaseofinajorassets

FinancingDailyOperations
Theday-to-dayoperationsoftheengineeringfirmwillrecpirefundstotakecare
cfecpensesastheycane.Moneymustbemadeavailableforthepaymentofthefollowing:•
I. wagesandsalaries
2. rent
3. taxes
4. powerandlight
5. marketingexpenseslikethoseforadvertising,entertainment,travelexpens, telephone.andtelegrap
h,stationeryandprinting,postage,etc.
6 . administrati veexpensesl ikethosefcraudi ting,I egalg:rvi ces, etc.

Anydelayinthes;ttlementof theforegoingexpensesmaydisrupttheeffectiveflowofworkinthecompany.ltma
yalsoerodethepublic'soonfidenceintheabilityofthecompanytooperateonalong-
termbasis.Creditors,forinstance,maywithholdtheectensionofcredittothecompany.

Financing the Firm's Credit Services

Itis oftentimes unavoidable forfirms to extend credit to customers. If the engineering firm manufactures
products, sales terms vary from cash to 90-day credit extensions to customers. Construction finns will have to finance the
construction of government projects that will be paid many months later.
When a new chemical manufacturing firm finds difficulty in convincing distributors tocarry their products, a
credit extension may solve the problem.A new problem, however, will be created, i.e., how the credit arrangement will
be financed.

Financing the Pm-chase of Inventory

The maintenance of adequate inventory is crucial to many firms . Raw materials, supplies, and parts are needed
to be keptin storage so they will beavailable when needed. Many firms cannot cope with delays in the availability of the
required material inputs in the production process, so these must be kept ready whenever required.
The purchase of adequate inventory, however, will require- sufficient funding and this must be
secured.Sometimes, inventories unnecessarily tie-up large amount of funds. The engineer manager must devise some
means to make sure this situation does not happen.

Financing the Purchase of Major Asset

Companies, at times, need to purchase major assets. When top management decides on expansion, there will be
a need to make investments in capital assetslikeland, plant, and equipment.Itis obvious that the fmancing of the purchase
of major assets must come from long-term sources

THE SOURCES OF FUNDS

To financeitsvarious activities, the engineering firm will have to make use of its cash inflows coming from
various sources, namely:
I. Cash sales. Cash is derived when the firm sells its products or services.
2. Collection of Accounts receivable. Some engineering firms extend credit 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 to resort to borrowing.
4. Sale of assets. Cash is sometimes obtained from the sale of the company's asset. .
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, medium-term, or long-term. Short-term sources of funds are
those with repayment schedules of less than one year. Collaterals are sometimes required by short-term creditors.

Advantages ofSlwrt-Term Credits. When the engineering firm avails of short-term credits, the following advantages may
be derived:
I . They are easier to obtain. Creditors maintain the view that the risk involved. in short-term lendingis also short-
term. Thus, short-term credits are made easilyavailable to qualified borrowers.
 2. Short-term financing is often less costly. Since short-term financing is favored by creditors, they make it available
at less cost.
3. Short-term financing offers flexibility to the borrower. After the borrower bas settled hisshort-term debt, he may
consider other means of financing, if he still requires it. Long-term financing, in contrast, eliminates this option. Heis
stuck with the long-term funds even if he no longer requires it.

Disad uantages ofShort-Term Credits. Short-term financing has also some disadvantages. "They are as follows :
1. Short-term credits mature more frequently. Th.is may place the engineering firm in a tight position more often
than necessary.When the frequency of the firm's cash inflows are more than twelve monthsapart, thefirm could
beinserious trouble meeting its short-term obligations.
2. Short-term debts may, at times, be more costly than long-term debts. When short-term debts are used to finance
long-term expenditures, the frequent renewals, adjustment of terms, and shop- ping for new sources may prove to
bemore costly.
Supplies ofShort-Term Funds. Short-term financing is provided by the following:
1. trade creditors
2. commercial banks
3. commercial paper houses
4. finance companies
5. factors, and
6. insurance companies.

Tradecreditorsrefertosuppliersextendingcredittoabuyerforuseinmanufacturing,processing,crreselling
goodsforprofit .• Theinstrumentsusedintradecreditconsistofthefollowing :( l)open-bookcredit,(2) tradoe
acceptance,and(3)promissorynotes.
Theopen-
bookcreditisunsecuredandperrnitsthecu st om e rtopayforgoodsdeliveredtohiminaspecifiednumberofdays.Forfinancia
llyweakengineeringfirms,thecpen-bookcreditisaveryusefulsourceoffinancing.
Thetradeacceptanceisatimedraftdrawnbyaselleruponapurchasepayabletotheselleraspayee,andacceptedbythepurc
haserasevidencethatthegoodsshippedaresatisfactoryandthatthepriceisdueandpayable.Underthetenns grantedinthetrad
eacceptance,thesellerallowsthebuyertopaywithinacertainnumber
ofdays.Thearrangementprovidesthebuyersomereliefinfinancinghisshort-te1urrequirements.
Apromissorynoteisanunconditionalpromiseinwritingmadebyonepersontoanother.signedbythemaker,engag:i.ngtop
ay,ondemandoratafixedordeter-minablefuturetime,acertainsumofinoneyto,ortotheordero( aspecifiedpersonortobearer

Commercial banksareinstitutionswhichindividualsorfirmsmaytaj)' as~urceofshort­

termfinanci ng.Commercialbanksgranttwo typesofshort-
termloans: ( l)thosewhichrequirecollateral,and(2)thosewhich donotrequirecollateral .
Commercialpaperhouse.sarethosethathelp business firms
inborrowingfundsfromthemoneymarket.Underthisscheme,thebusinessfirrninneedoffundsissuesacommercial paper,
which is a short-term promissory note, generally unsecured, and issued by large, established firms.• The
commercial paper is sold to investors through the commercial paper house.

Business finance companies are financial institutions that finance inventory and equipment of almost all types and
sizes of business firms
Factors are_ institutions that buy the accounts receivables of :firms, assuming complete accounting and collection
responsibilities.7 Engineering firms which main · tain sizable amounts of accounts receivable may avail of the
services of factors when they are in dire need of cash.
Insurance companies are also possible sources of short-term fonds . Industry reports indicate that insurance
companies in the Philippines regularly mal(e invest- ments in short-term commercial papers and promissory
notes.
Long-Term Sources of Funds
There are instances when the engineering firm will have to tap the long-term sources of funds. An example
is when expenditures for capital assetsbecome necessary. After the amount required is determined, a decision has
to be made on the type of source to be used.
Long-term sources of funds are classified as follows :
1. long-term debts
2. common stocks, and
3. retained earnings:.
Long-term debts are sub classified into term loans and bonds.
Term Loans. A term loan is a "commercial or industrial Joan from a commercial bank, commonly used for plant
and equipment, working capital, or debt repayment.'" Term loans have maturities of2 to 30 years.
The advantages oftenn loans as a long-term source of funds are as follows :
1. Funds can begenerated more quickly than other long-term sources.
2. They are flexible, i.e., they can be easily tailored to the need.8 of the borrower.
3. Thecostofissuance is low compared to other long- term sources.
Bonds.A bond is a certificate ofindebtednessissued by a corporation to a lender. It is a marketable security that the
firm sells to raise funds. Since the ownership o/bonds can be transferred to another person, investors are attracted
to buy them.

TYPE OF BOND FEATURE

1. Debentures no collateral requir ment

2. Mortgage bond ecured by real estate
3. Collateral trust l>ood secured by stocks and bonds
owned by the 1ssu1ng
corporation
4 . Guaranteed bond payn ent of interest or pnnc1-
pal 1s guaranteed by one
or more md1v1duals o r
corporahons
s. Subordinated debentures w th an mfenor claim over other
d bts
6. Convertib e bonds convertible ·nto shares of com-
mon stock
7. Bonds with warrants warrants are ophons which
permit th hol der to bu y
stock of the issuing com-
pany at a stated price
8 Income bonds pays mtere r only when earned

Common Stocks. The third source oflong-term funds consists of the issuance of common stocks. Since common
stocks represent ownership ofcorporations, many investors are placing their money in them.
When properly utilized, common stocks can be cheaper andmom stablesourcesoflong-term funds .Unlike
bonds and term loans which must be repaid at a certaindate, common stocks do not have maturity and repayment
dates.

Retained Earnings. Retained earnings refer to "corporate earnings not paid out as dividends. This simply means
that whatever earnings that are due to the stock- holders of a corporation are reinvested. Because these retained
earnings can be used by thefirm indefinitely, they become an impor'8nt source oflong-term financing.
T EBESTSO C OFFIN C G
As there are various fund sources, the engineer manager, or whoever is in charge, must determine which source is
the best available for the firm.
'lbdetermine the best source, Schall and Haley recom-
mends that the following factors must be considered: 11
1. flexibility
2. risk
3. mcome
4. control
5. timing
6. other factors likecollateral values, flotation costs,speed, and exposure.
Flexibility
Some fund sources impose certain restrictions on the activities of the borrowers. An example of o
restriction is the prohibition on the issuance of additional debt instruments by the borrower.
As some fund sources are less restrictive, the flexibility factor must be considered. In general, however,
abort-term fund sources offer more flexibility than long- term sources. This is so because after settling the debt,
short-term borrowers may shift to other types of financing. Long-term borrowers are given this opportunity only
after a longer period of waiting.
Risk
Wben applied to the determination of fund sources, risk refers to the chance that the company will be
a.ffec- ted adversely when a particular source of financing is chosen.
Generally, short-term debt "subjects the borrowing firm to more risk than does financing with long-term debt."'
This happens because of two reasons:
1. short-term debts may not be renewed with the same terms as the previous one, if they can be renewed at
all.
2. since repayments are done more often, the risk of defaulting is greater.
Income
The various sources of funds, when availed of, will have their own individual effects in the net income of
the engineering firm.When the firm borrows, it must gene· rate enough income tocover thecost of borrowing and
still be left. with sufficient returns for the owners.
It is possible that the owners were enjoying higher rates of return on their investments before borrowing was made.
The reverse may happen, however, at other times. Nevertheless, the effects on income must be considered in
determining the source of funding to be used.
Control
When new owners are taken in because of the need for additional capital, the current group of owners may
lose control of the :finn. If the current owners do not want this to happen, they must consider other means of
financing

Timing
The financial market has its ups and downs. This means that 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.

Other factors
There are other factors considered in determining the best source of funds. They are as follows :
1 Collateral values:Are there assets available as collateral?
I Flotation cost: How much will it cost to issue bonds or stocks?
3 Speed: How fast can the funds required be raised?
- Exposure:'ln what extent will the :finn be exposed to other parties?

THE FIRM'S FINANCIAL HEALTH

Jn general, the objectives of engineering firms are as follows:
1. to make profits for the owners;
2 to satisfy creditors with the repayment ofloan plus interest;
3 to maintain the viability of the :finn so that customers will be assured o a continuous supply o products
or services, employees will be assured of employment, suppliers will be assured of market, etc.