TABLE OF CONTENTS

Managing Marketing Function

Definition of Marketing Concept

The Engineer and the Four Ps of Marketing

The Product

The Price

The Place

The Promotion

Strategic Marketing for Engineers

Selecting a Target Market

Developing Marketing Mix

Managing the Finance Function

What the Finance Function Is

The Determination of Fund Requirements

The Sources of Funds

The Best Source of Financing

The Firm's Financial Health

Indicators of Financial Health

Risk Management and Insurance

MANAGING MARKETING AND FINANCIAL FUNCTION 2

 OBJECTIVES

General Objective:

To define marketing and financial function on human behavioral organization and to

come up with an activity which will measure the knowledge of student in marketing and
finance function

Specific Objectives:

To be able to identify the 4Ps of Marketing

To be able to enumerate the steps in Strategic Marketing for Engineers
To define what is the finance function
To enumerate and differentiate the requirements and sources of funds
To enumerate the factors on how to choose the best source of financing
To define the meaning and importance of financial health in the company
To list the factors that indicates the financial health of the company
To explain the importance of risk management and insurance
The students shall be able to be able to come up with a business plan and strategize their
marketing plan and determine their source of finance

MANAGING MARKETING AND FINANCIAL FUNCTION 3

 MANAGING THE MARKETING FUNCTION

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 Ps of Marketing

The engineering organization will be able to meet the requirements of its clients (or
customers) depending on how it uses the four Ps of marketing which are as follows:

1. The Product (or service)

2. The Price

3. The Place, and

4. The Promotion

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 bonuses are given to clients. As example is
the construction company that provides free estimates on whatever inquiries on construction
are received.

Example

MANAGING MARKETING AND FINANCIAL FUNCTION 4

McDonalds Products (Product Mix)

McDonalds provides mainly food and beverage products. This element of the marketing
mix covers the various organizational outputs (goods and services) that a company provides to its
target customers. McDonalds product mix has the following main product lines:

Hamburgers and sandwiches

Chicken and fish

Salads

Snacks and sides

Beverages

Desserts and shakes

Breakfast/All-day breakfast

McCaf

McDonalds is primarily known for its burgers. However, the company expands its
product mix through time. At present, customers can purchase other popular products like
chicken and fish, desserts, and breakfast meals. This element of McDonalds marketing mix
indicates that the firm innovates new products to attract more customers.

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,
however, in the selling of services and ideas. This is because of the uniqueness of every service
rendered or every idea generated.

MANAGING MARKETING AND FINANCIAL FUNCTION 5

 When a type of service becomes standardized, price can be a strong competitive tool.

Example

McDonalds pricing strategy involves price bundling combined with psychological pricing. In
price bundling, the company offers meals and other product bundles for a discount. In
psychological pricing, McDonalds uses prices that appear to be significantly more affordable,
such as $__.99 instead of rounding it off to the nearest dollar. This element of McDonalds
marketing mix highlights the importance of price bundling to encourage customers to buy more
products.

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. Establiszhing branches where customers are located;

4. Establishing franchises in selected zareas.

Manufacturing companies can choose or adapt all of the above-mentioned options.

Service companies like construction firms adapt the modified versions.

Example

McDonalds restaurants are the most prominent places where the companys products are
distributed. This element of the marketing mix indicates the venues or locations where the firms
products are offered. McDonalds main places for distributing its products are as follows:

MANAGING MARKETING AND FINANCIAL FUNCTION 6

 Restaurants

Kiosks

Postmates website and app

McDonalds mobile app

McDonalds restaurants are where the company generates most of its sales revenues. Some of
these restaurants also manage kiosks to sell a limited selection of products, such as desserts.
Some kiosks are temporary, as in the cases of kiosks used in seasonal events and professional
sports competitions. In addition, customers can place their orders through the Postmates website
and mobile app. Moreover, the companys mobile apps for iOS and Android OS let customers
claim special deals and find McDonalds restaurant locations. This element of the marketing mix
supports McDonalds intensive growth strategies, especially market penetration.

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 informed, persuaded, and influenced. The activity referred to, in this case, is called
promotion.

McCarthy and Perrault define promotion as communicating 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:

1. Advertising

It is defined 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.

2. Publicity

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 Publicity is the promotional tool that publishes news or information about a product,
service, or idea in behalf of a sponsor but is not paid by the sponsor.

3. Personal selling

It refers to as oral presentation in a conversation with one or more perspective

purchasers for the purpose of making a sale.

4. Sales promotion

It is any paid attempt to communicate with customers other than advertising, publicity,
and personal selling. This includes displays, contests, sweepstakes, coupons, trading stamps,
prizes, samples, demonstrations, referral gifts, etc.

Example

McDonalds promotes its products to attract more customers. This element of the marketing mix
defines the approaches used to communicate with the customers. McDonalds uses the following
tactics in its promotional mix:

Advertising

Sales promotions

Public relations

Direct selling

McDonalds advertisements are the most notable among its promotion tactics. The company uses
TV, radio, print media and online media for its advertisements. McDonalds also uses sales
promotions to draw more customers to its restaurants. For example, the company offers discount
coupons and freebies for certain products. In addition, McDonalds public relations activities
help promote the business to the target market. For instance, the Ronald McDonald House
Charities and the McDonalds Global Best of Green environmental program support
communities while boosting the value of the corporate brand. Occasionally, the company uses
direct selling, such as for corporate clientele, local government or community events and parties.

MANAGING MARKETING AND FINANCIAL FUNCTION 8

In this element of its marketing mix, McDonalds emphasizes advertising as its main approach to
promote its products.

Strategic Marketing for Engineers

Companies, including those manage by engineer managers, must server 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

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 has 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 segemet 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 reserved

by the company.

A smaller company may find it most profitable to supply only the construction material
needs of the residential, industrial, and government segment. This decision will depend,
however, on the profit potentials of each segment and the capability of the firm.

Factors Used in Selecting a Target Market

Target market must have the ability to satisfy profit objectives of the company. In
selecting target market, the following factors must be taken into consideration:

MANAGING MARKETING AND FINANCIAL FUNCTION 9

 a. The size of the market, and

b. The number of competitors serving the market.

2. Developing a marketing mix

After the target market has 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 the marketing environment, the engineer manager can manipulate any or all the
variables to achieve companys goal. 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.

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WHAT IS THE FINANCE FUNCTION?

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 firm as a whole, he
must be concerned with the determination of
the amount of funds required, when they are needed, how to procure them, and how the
effectively and efficiently use them.

In the performance of his duties, the engineer manager, at whatever management level he
is, must do his share in the achievement of the financial objectives of the company.

The finance function is one of the three basic management functions. The other two are
production and marketing.

THE DETERMINATION OF FUND REQUIREMENTS

Any organization, including the engineering firm, will need

funds for the following specific requirements.

1. To finance the daily operations

2. To finance the firms credit services

3. To finance the purchase of inventory

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 4. To finance the purchase of major assets

Financing Daily Operations

The day-to-day operations of the

engineering firm will require funds to take care
of expenses as they come. Money must be made
available for the payment of the following.

1. wages and salaries

2. rent

3. taxes

4. power and light

5. marketing expenses like those for advertising, entertainment, travel expenses,

telephone and telegraph, stationery and printing, postage, etc.

6. administrative expenses like those for auditing, legal, services, etc.

Any delay in the settlement of the foregoing expenses may disrupt the effective flow of
work in the company. It may also erode the publics confidence in the ability of the company to
operate on a long-term basis. Creditors, for instance, may withhold the extension of credit to the
company.

Financing The Firms Credit Services

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 It is oftentimes unavoidable for the firms to
extend credit to costumers. If the engineering firm
manufacturers products, sales terms vary from
cash to 90-day credit extensions to costumers.
Construction firms 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 to

carry 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 Purchase of Inventory

The maintenance of adequate inventory is crucial to

many firms. Raw materials, supplies, and parts are needed to
be kept in storage so they will be available 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 assets like land, plant, and
equipment.

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 It is obvious that the financing of the
purchase of major asset must come from long-
term sources.

THE SOURCES OF FUNDS

To finance its various activities, the engineering firm

will have to make use of its cash inflows coming from various
sources, namely:

1. Cash sales. Cash is derived when the firm sells its

products or services

2. Collection of Accounts Receivable. Some

engineering firms extend credit to costumers. When
these are settled, cash is made available.

3. Loans and Credits. When the 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 companys assets.

5. Ownership contribution. When cash is not enough, the firm may tap its owners to
provide more money.

6. Advances from costumers. Sometimes, costumers are required to pat cash advances
on orders made. This helps the firm in financing its production activities.

Short-Term Sources of Funds

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 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 of Short-Term Credits. When the

engineering firm avails of short-term credits, the following
advantages may be derived:

1. They are easier to obtain. Creditors maintain the view that the risk involved in short-
term lending is also short-term. Thus, short-term credits are made easily available 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 has settled
his short-term debt, he may consider other means of financing, if he still requires it.
Long-term financing, in contrast, eliminates this option. He is stuck with the long-
term funds even if he no longer requires it.

Disadvantages of Short-Term Credits. Short-term financing has also some disadvantages. They
are as follows:

1. Short-term credits mature more frequently. This may place the engineering firm in a
tight position more often than necessary. When the frequency of the firms cash
inflows are more than twelve months apart, the firm could be in serious 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 shopping for new sources may prove to be more costly.

Supplies of Short-Term Funds. Short-term financing is provided by the following:

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 1. trade creditors

2. commercial banks

3. commercial paper houses

4. finance companies

5. factors, and

6. insurance companies.

Trade creditors refers to suppliers extending credit to a buyer for use in manufacturing,
processing, or reselling goods profit. The instruments used in trade credit consist of the
following: (1) open-book credit, (2) trade acceptance, and (3) promissory notes.

The open book credit is unsecured and permits the costumer to pay for goods delivered to him in
specified number of days. For financially week engineering firms, the open book credit is a very
useful source of financing.

The trade acceptance 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. Under the terms
granted in the trade acceptance, the seller allows the
buyer to pay within a certain number of days. The
arrangement provides the buyer some relief in
financing his short-term requirements.

A promissory note is an unconditional promise in

writing made by one person to another, signed by the
maker, engaging to pay, on demand or at a fixed or determinable future time, a certain sum of
money to, or to the order of, a specified person or to bearer.

Commercial banks are institutions which individuals of firms may tap as source of short-term
financing. Commercial banks grant two types of short-term loans: (1) those which require

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collateral, and (2) and those which do not require collateral. Examples of commercial banks
granting short-term loans are City Trust, Premier Bank, and Land Bank.

Commercial paper houses are those that help business firms in borrowing funds from the money
market. Under this scheme, the business firm in need of funds issues a commercial paper, which
is 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 size of business firms. Examples of finance companies in the Philippines are
Philacor Credit Corporation and Consolidated Orix Leasing and Finance Corporation.

Factors are institutions that buy the accounts receivables of

firms assuming complete responsibilities. Engineering firms
which maintain 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

funds. Industry reports indicate that insurance companies in the Philippines regularly make
investments 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 the expenditures for capital assets become 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.
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Long-term debts are sub-classified into term loans and bonds.

Term Loans. A term loan is a commercial or industrial

loan from a commercial bank, commonly used for plant
and equipment, working capital, or debt repayment, The
loans have maturities of 2 to 30 years.

The advantages of term loans as a 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.

Bonds. A bond is a certificate of indebtedness issued by a

corporation to a lender. It is a marketable security that the firm
sells to raise funds. Since the ownership of bonds can be
transferred to another person, investors are attract to buy them.

The type of bonds are shown below

TYPE OF BOND FEATURE

1.Debentures no collateral requirement

2.Mortgage bond secured by real estate

secured by stocks and bonds owned issuing
3.Collateral trust bond
corporation
payment or interest or principal is guaranteed
4. Guaranteed bond
by one or more individuals or corporations
5.Subordinate debentures with an inferior claim over other debts

6.Convertible bonds convertible into shares of common stock

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7.Bonds with warrants warrants are options which permit the holder
to buy stock of the issuing company at a
stated price
8.Income bonds pays interest only when earned

Common Stocks. The third source of long-term funds consists of

the issuance of common stocks. Since common stocks represent
ownership of corporations, many investors are placing their
money in them.

When properly utilized, common stocks can be cheaper and more

stable sources of long-term funds. Unlike bonds and term loans
which must be repaid at a certain date, 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 stockholders of a corporation are
reinvested. Because these retained earnings can be used by the firm indefinitely, they become an
important source of long-term financing.

In like manner, the sole owner of an engineering firm may decide to reinvest whatever
profits he derives from his business. The same decision may be adapted by the owners of a
partnership.

THE BEST SOURCE OF FINANCING

In todays scenario, the business operates in a dynamic environment. Decision making

plays an important role, especially when such decisions are concerned with procurement and
usage of finance, which is the lifeblood of any organization. Comparing various alternatives and
evaluating them on the basis of various crucial factors, helps in building an optimum capital
structure for the business.
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 Choosing an appropriate source of business
finance can be a difficult and time-consuming task. This
is due to the sheer amount of funding options available.
Financing can come in the form of debt or investment,
and finance terms can vary significantly. The criteria and
implications of each source require critical analysis
before proceeding, and it is essential to weight the cost versus benefits of each source before
making a decision.

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. Below are the factors to determine the
best source according to Schell and Haley:

1. flexibility

2. risk

3. income

4. control

5. timing

6. other factors like collateral values. flotation coats, speed, and exposure.

Flexibility

Some fund sources impose certain restrictions on the

activities of the borrowers. An example of a 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, short-term fund sources offer more flexibility
than long-term sources. This is so because after settling the debt, short-term borrowers may shift

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to other types of financing. Long-term borrowers are given this opportunity only after a longer
period of waiting.

Risk

When applied to the determination of fund sources,

risk refers to the chance that the company will be affected
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.

Risk is an important element to consider. We must consider what will happen if we are
unable to meet the financial commitments relating to that particular source of finance. If we
borrow from friends and family, for example, we will need to take into account what would
happen to our relationship with them should the business fail and we are unable to repay them.

What will happen if we are unable to meet the

financial commitments of a bank loan if our business
succumbs to financial difficulty? When it comes to choosing
suitable funding, we must strive to minimise the overall risk.

If we are a startup, we must bear in mind that certain

suppliers of funding will perceive us as having a higher risk
of failure than an existing business. As a result, funding may prove more difficult to obtain.
Despite the economic downturn, banks are still lending. However, they are more cautious about

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where the money is going. Especially when considering a loan to new businesses with no track
record. Therefore, guarantors or a letter of guarantee are often required on startup loans.

If we are perceived as risky, then the financier will require a higher return as
compensation for that risk, thereby increasing the cost of capital for us. Financiers, whether a
bank or investor, will look at the performance of the industry in which we operate. Buying
patterns and customer spending will all be taken into account when determining the level of risk.

Income

The various sources of funds, when availed of,

will have their own individual effects in the net income
of the engineering firm. Again, net income is the
company's total earnings (or profit). Net income (total
comprehensive income, net earnings, net profit,
informally, bottom line) is an entity's income minus cost
of goods sold, expenses and taxes for an accounting
period. When the firm borrows, it must generate enough income to cover the cost 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 firm. If the current owners do not want this to happen,
they must consider other means of financing.

Control is another factor that plays an important role when choosing a source of finance.
Issuing additional shares (equity) will result in a dilution of control among existing

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 shareholders/owners. You are effectively giving each
investor a piece of ownership in your business and thereby
are accountable to those shareholders.

Investors will require input into the operations such

as sitting on the board of directors and receiving
performance and operation reports. You will have to
provide them with information that you may have wished to keep hidden from your competition,
as well as detailed explanations for your business decisions.

Owners who do not want to lose control of their business, preferring to keep major
decision-making in their own hands, will only consider equity financing up to a certain level or
may prefer loan capital.

Once the loan is paid back, your relationship with the lender ceases, whereas investors
continue to have a say in the company until they are bought out, the company is sold, or goes
public. As a result, how we choose to finance our company will have an impact on our
independence as management.

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

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 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?
Collateral is a property or other asset that a
borrower offers as a way for a lender to secure the
loan. If the borrower stops making the promised loan payments, the lender can seize
the collateral to recoup its losses.

2. Flotation cost: How much will it cost to issue bonds or stocks?

Flotation costs are incurred by a publicly traded company when it issues new
securities, and includes expenses such as underwriting fees, legal fees and registration
fees.

3. Speed: How fast can the funds required be raised?

4. Exposure: To what extent will the firms be exposed to other parties?

THE FIRM'S FINANCIAL HEALTH

Financial health is a term used to

describe the state of one's personal financial
situation. An informal expression used to
describe a situation in which an investor or an
economy is in a good financial position. More
generally, it refers to being in the best of health
or condition.

In general, the objectives of engineering firms are as follows:

1. to make profits for the owners;

2. to satisfy creditors with the repayment of loans plus interest;

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 3. to maintain the viability of the firm so that customers will be assured of a
continuous supply of products or services, employees will he assured of employment,
suppliers will be assured of t market, etc.

The foregoing objectives have better chances of achievement if the engineering firm is
financially healthy and has the capacity to be so on a long-term basis.

INDICATORS OF FINANCIAL HEALTH

To get an idea of the companys anticipated returns and future financial needs, ask the
business owner and/or accountant to show you projected financial statements for the business.
Balance sheets, income statements, cash flow statements, footnotes and tax returns for the past
three years are all key indicators of a businesss health. These documents will help you do some
financial analyses that will spotlight any underlying problems and also provide a closer look at a
wide range of less tangible information.

The financial health of an engineering firm may be determined with the use of three basic
financial statements. These are as follows:
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 1. Balance sheet also called statement of financial position;

2. Income statement also called statement of operations;

3. Statement of changes in financial position.

To be able to determine the financial health of a firm, the

appropriate financial analysis must be undertaken. A full
discussion of financial statements and analysis are indicated In
Chapter 9. Examples of balance sheet and income statements are
also presented in Chapter 9.

Signs that the Company is In the Pink

1. Your Revenue Is Growing

When looking at your profit-and-loss statement, you should be

able to see a pretty steady increase in your revenue month over month,
year over year. It doesnt have to be a huge spike in profitability, but
even just an increase of a couple percent shows upward movement
and a strong financial outlook.

2. Your Expenses Are Staying Flat

In conjunction with your revenue growing, you want your

expenses to stay flat. If your business experiences a significant
growth spurt, then your expenses may rise, but in general, this
increase should be in-line with your increase in revenue. So if your
revenue is increasing 3% year over year, youd want your expenses
to increase no more than 3% during the same timeframe.

3. Your Cash Balance Demonstrates Positive Long-Term Growth

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 While you may be increasing your revenue, if youre taking
that money and simply investing it back into the business, you
might find yourself asset rich and cash poor.

A low or stagnant cash balance means your business is not

sustainable. You want to keep a healthy amount of cash in the bank
so that if anything urgent comes up, you arent in a position of having to incur more debt to meet
an unexpected expense.

4. Youre Working With New Clients and Repeat Customers

The cost to acquire new clients is higher than the cost

to work with the same customers over and over again. A steady
stream of new clients and repeat customers demonstrates that
your business has multiple options for generating revenue. By
having access to new customers, you can help to insulate your
business from changing attitudes and buying patterns.

RISK MANAGEMENT AND INSURANCE

The engineer manager, especially those at the

top level, is entrusted with the function of making
profits for the company. This will happen if losses
brought by improper management of risks are avoided.

Risk is a very important concept that the engineer manager must be

familiar with. Risks confront people everyday. Companies are exposed to
them. Newspapers report on a daily basis the destruction of life and
property. Companies that could not cope with losses are forced to shut
down, according to reports.

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 Fortunately, the engineer manager is not entirely helpless. He can use sound risk
management practices to avoid the threat of bankruptcy due to lasses.

Risk Defined

Risk refers to the uncertainty concerning loss or injury. The engineering firm is faced
with a long list of exposure to risks, some of which are as follows:

1. fire

2. theft

3. floods

4. accidents

5. nonpayment of bills by customers (bad debts)

6. disability and death

7. damage claim from other parties.

Types of Risk

Risks may be classified as either pure or speculative. Pure risk is one in which "there is
only a chance of loss." This means that there is no way of making gains with pure risks. An
example of pure risk is the exposure to loss of the company's motor car due to theft. Pure risks
are insurable and may be covered by insurance.

Types of Pure Risk

1. Personal Risks

These are the risks that directly affect the individuals capability to earn income. Personal
risks can be classified into the following types:

Premature Death: Death of the bread earner with unfulfilled or

unprovided financial obligations.

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 Old Age: It refers to the risk of not having sufficient income at the age of retirement or
the age becoming so that mere is a possibility that the individual may not be able to earn
the livelihood.

Sickness or Disability: The risk of poor health or disability of a person to earn the means
of survival. E.g. the possibility of damage to limbs of a driver due to an accident.

Unemployment: The risk of unemployment due to socio-economic factors resulting in

financial insecurity.

2. Property Risks

These are the risks to the persons in possession of the property

being damaged or lost. The immovable like land and building being
damaged due to flood, earthquake or fire, the movables like appliances
and personal assets being destroyed due to the fire or stolen.

The losses may be direct or indirect/consequential. A direct loss

implies the visible financial loss to the property due to mishappenings.
Whereas, the indirect ones are the losses arising from the occurrence of an incident resulting in
direct/physical damages or loss.

The loss to crops due to flood is a direct loss the destruction of the growing power is a
consequential one.

3. Liability Risks

These are the risks arising out of the intentional or

unintentional injury to the persons or damages to their
properties through negligence or carelessness.

Liability risks generally arise from the law. E.g.

liability of the employer under the workmens compensation
law or other labor laws in India. In addition to the above categories, risks may also arise due to
the failure of others.

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 For example, the financial loss arising from the non-performance or standard
performance in a contract in engineering/ construction contracts.

Speculative risk is one in which there is a chance of either loss or gain. This type of risk
is not insurable. An example of a speculative risk is investment in common stocks. If one wants
to make gains in the common stock market, the nuances and intricacies of investments must be
learned and properly applied. Also, operating the engineering firm is a kind of speculative risk. If
profits are expected, then proper management techniques must be used.

What is Risk Management

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 the available
methods of dealing with risk in order to secure the economic survival of the rm

Risk management to designed to deal with pure risks, while the application of sound
management practices are directed toward speculative risks that are inherent and cannot be
avoided.

Methods of Dealing with Risk

The are various methods of dealing with risks. They are as follows:

1. the risk may be avoided

A person who wants to avoid the risk of losing a

property like a house can do so by simply avoiding the
ownership of one. There are instances, however, when
ownership cannot be avoided like those for equipment,
appliances, and materials used in the production process. In
this case, other methods of handling risk must be
considered.
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 2. the risk may be retained

Risk retention is a method of handling risk

wherein the management assume the risk. A
planned risk retention, also called self-insurance,
is a conscious and deliberate assumption of.
recognized risk. In this case management decides
to pay losses out of currently available funds.
Unplanned risk retention exists when management does not recognize that a risk exists
and unwisely believes that. no loss could occur.

3. the hazard may be reduced

Hazards may be reduced by simply

instituting appropriate measures in a variety of
business activities. An example is prohibiting
unauthorized persons to enter the cashiers officer.
This will reduce the hazard of theft. Another
example is prohibiting company drivers from
taking alcohol or drug while on duty. Newspaper
reports on the accidental killing of three persons including Princess Diana is a well-
publicized case of drunken driving.

4. the loses may be reduced

When losses occur in spite of preventive measures, the severity of loss

may be limited by way of reducing the concentration of exposures. Examples of
efforts on loss reduction are as follows:

l. physically separating buildings to minimize losses in case of fire;

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 2. using fireproof materials on interior building on its construction;

3. storing inventory in several locations to minimize 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 together; and

7. limiting legal liability by forming several separate corporations

5. the risk may be shifted

Another method of handling risk is by shifting it to another party.

Examples of risk shifting are hedging, subcontracting. incorporation, and
insurance.

Hedging refers to making commitments on both sides of a transaction so

the risks offset each other.

When a contractor is confronted with a contract bigger than his company's

capabilities, he may invite sub-contractor in so that some of the risks may be
shifted to them.

In a corporation, 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. The liability of the stockholder is limited to his
capital contribution.

To shift risk to another party, a company buys insurance. When a low

occurs, the company is reimbursed by the insurer for the loss incurred subject to
the term of the insurance policy.

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 REFERENCES

Medina, R.G. (2011) Human Behavior in Organization

Khan, M. Y., and P. K. Jain. Financial management. New Delhi: Tata McGraw-Hill, 2007. Print,

Business Management Daily. (2010). Understand your firms financial health. Retrieved March

8, 2017 from http://www.businessmanagementdaily.com/8005/understand-your-firms-

financial-health

Entrepreneur Media, Inc. (2017). 8 Factors That Determine the Financial Health of a Business.

Retrieved March 8, 2017 from https://www.entrepreneur.com/article/240611

Intuit Inc. (2016). 7 Signs Your Company Has Good Financial Health. Retrieved March 8, 2017

from http://quickbooks.intuit.com/r/financial-management/7-signs-your-company-has-

good-financial-health/

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