UNIT 5

Business Functions:
Operations and Finance
Defined:

Operations management is concerned with

the management of the transformation
process whereby products are manufactured
and services rendered.
 Operations Management

1. Introduction

A business transforms inputs from the

environment into outputs to the environment.
The opeartions function is that function of the
business aimed at executing the transformation
process.
The operations function and management
thereof (operations Management) are therefore
directly concerned with creating products and
providing services inorder to realise the
objectives of the business.
2. The importance of Operations management:

An active and efficient operation can give a business four types of

advantages.

§ It can reduce the costs of making the products or offereing

services. Reducing the cost of production by being more efficient
and having less waste, rework, scrap, cut offs, spillage and so will
directly contribute towards profitability.
§ It can increase the revenue the business receives for offering its
products and services to its customers. Sales will increase because
of quality products and services offering good value for money.
§ It can reduce the amount of investment (capital) needed to
manufacture the type and quantity of products or services
required. Increasing the effective capacity of the operation better
use of facilities, machines or equipment, may reduce capital
needed to buy more machines.
§ It can provide the impetus for new innovation by using its solid
base of operational skills and knowledge to develop new products
and services.
Other reasons why the operations management is
considered important to a business includes the following:

§ Opeartions management can improve productivity.

Productivity measured as the ration of output to input.
Producing more error free.
§ Operations management can help a business to satisfy
the needs of its customers/clients more effectively.
Customers are important to the business and the
manager should make sure that quality products and
services are provided to them at a reasonable price.
§ Operations management can be decisive for the general
reputation of the business.
3. Operations management strategies and
performance objectives.

All businesses formulates business objectives, and if a

business intends surviving in a long term, consumers who
are satisfied with the business’ products and services
should be top-priority objective.

The operations management function should take

cognizance of customer’ needs and continually formulate
its strategies and objectives in such a way that the
competitive position is strengthened and expanded.
Although customers needs are numerous they can be
reduced to six main elements.

1. Higher Quality
2. Lower Costs
3. Shorter Lead time (Quicker manufacturing or provision
of services)
4. Greater Adaptability (flexibility)
5. Lower variability with regard to specifications
(realiability)
6. Higher level of Servicen (Offering better overal service)
The operations management performance objectives are formulated
in such a way that they are applicable to both manufacturers and
service providers.
To acquire operations based advantages, the following six general
operation – management performance objectives. (which corporate
the above mentioned customer/client needs) can be followed:

1. Do things right the first time – Operation should not make

mistakes.
2. Do things cost effectively – products and services to be produced
at a cost that will keep the business in the market.
3. Do things quickly – time between demand of a product and
delivery to the customer should be as short as possible.
4. Make changes quickly – the operations function should be able to
adapt to change if unforseen circustances makes it necessary to do
so.
5. Do things right every time – error free products nad services
should be provided continiously.
6. Do things better - also provide better products and services in
comparison to its competitors.
4. The Transformation Model

The operations function is primarily concerned with using

resources (inputs) to provide outputs by means of a
transformation process.
Therefore, the transformation model comprises of three
main components:

§ Inputs
§ The transformation process itself
§ The outputs
a) Inputs
Inputs used in the transformation process comprise both
the resources that are to be transformed and the resources
required to make the transformation possible.

The resources to be transformed include the following:

§ Material
§ Customers
§ Information
The resources needed to make transformation possible:
§ Human resources
§ Equipment and Facilities
§ Technology
b) The Transformationprocess

The transformation process converst inputs into output.

The nature of the process is determined by which type of
input is being processed.
When materials are transformed, the process include
changing the physical characteristics.

E.G.... If its information is cahnged into a report

c) Outputs

The ultimate goal of any transformation process is to

transform inputs into outputs.

Outputs assume the form of what is called products or

services.
5. Different operations have diferent characteristics

While the basic purpose of all operations is similar in that

they transform inputs into outputs, the process may differ
fundamentally in four ways.

The Four Vs

1. Volume
2. Variety of Output
3. Variation of output
4. Visibility of output
Financial Management

1. Introduction

Financial management is the art and science of obtaining enough

finance for a business at the lowest cost.
Investing in assets earning a return greater than the cost of capital
and managing profitability, liquidity and solvency of the business.
1. In financial management, we give answers to
questions such as:

§ Which long-term investment should we take on as a

business? That is what lines of business should we be in,
and what sorts of buildings, machinery and equipment
do we need?
§ Where will we get the long-term financing to pay for
these investments? This could mean bringing in other
owners or borowing the money needed, of course at a
cost.
§ How will we manage the everyday financial activities
such as collecting from customers and paying suppliers.
2. Financial management decisions will be around the following:

§ Capital Budgeting: - that is the business’s long term investment,

the process of planning and managing a business’s long term
investments, so called capital budgeting, and which investment
opportunities exist for the business. Timing, size and risk of future
sustainable cashflow is key.
§ Capital structure: - the ways in which the business obtains and
manages the long term financing it needs to support its long-term
investments. This includes the mixture of debt and equity that a
business uses to finance its operations.
§ Working capital: - this is related to the short-term assets of the
business, such as inventory and short-term liabilities, such as
money owed to suppliers. How much of cash and inventory business
should keep in hand and wether to sell on cash or credit, and if so
under which terms? Were to borrow financing for short-term
operations.
§ Finally, financial management need to care about how to return
the proceeds from its businesses’s investmens to shareholders. You
should decide wether topay dividends, or retain the earnings to
investst in new projects.
3. The finnacial function and financial management

Business must have the neccesary assets such as land, buildings,

machinery, vehicles, equipment, raw materials and trade
inventories for it to function efficiently.
In addition, business organisations need further resources such as
labour and services.

A business needs funds, also called capital to obtain the required

assets, resources and services to take of its operations.

Financial function is concerned with the flow of funds. In

particular, it is concerned with the acquisition of funds known as
financing, and the application of funds for acquisition of assets
known as investment, as well as the administration of and
reporting on financial matters known as accounting.
Financial managent tasks

§ Financial analsysis, reporting, planning and control.

§ Management of the financial structures.

§ Management of the asset structure.

4. Concepts in financial management

§ The statement of financial position

§ Capital
§ Income
§ Costs
§ Profit
5. Objective and fundamental principles of financial
management.

The long-term objective should be to increase the value of

the business. This may be accomplised by:

§ Investing in assets that will add value to the business,

ad give a good return on investments.

§ Keeping the cost of capital of the business as low as

possible.
Financial management is based on three principles:

§ The risk – return Principle: – risk is the probability that the actual
results of a decision may deviate from the planned end results,
with possible financial loss or waste of funds. The risk –return
principal is a trade off between risk and return. The greater the
risk, the greater the the required rate of return expected.
§ The cost-benefit principle: - decision-making which is based on
the cost of resources only, will not necessarily lead to the most
economic utilisation of resources. Sound financial decisions-making
requires making analysis of the total cost and the total benefits,
ensuring that the benefit always exceed the cost.
§ The time value of money principle: - this principle means that a
person could increase the value of any amount of money by earning
interest. If the amount is however invested in inventory,
equipment, vehicles and so on, the amount cannot earn interest.