GEC 527

ENGINEERING MANAGEMENT (3 UNITS)

MODULE 2
 FORMATION OF COMPANY
 SOURCES OF FINANCE, MONEY AND CREDIT
 NATIONAL POLICIES
 ORGANIZATIONAL MANAGEMENT;
MANAGEMENT BY OBJECTIVES.

Instructor: Engr. Justin D. Lazarus

 MODULE OVERVIEW AND DESCRIPTION
The module centres on;
Explicit knowledge on company formations and
Effective management approaches for a successful and continuous
management of a company or business.
This will give a broad background on engineering practice that
focuses on
Finance, decision making techniques, policies, resource
management.

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Week 4 outline
 Formation of company,
 sources of finance
 money and credit

The objectives are to;

 Discuss company formation process and the
characteristics of different types of companies.
 Discuss the concepts of finance, money and credit
and the different sources of finance

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 Course Learning Outcomes (CLO)
At the end of this section, students should be able to;
 Describe a company and distinguish the different types of companies using
their characteristics
 describe the stages in the formation of a company,
 enumerate the documents to be filed with the registrar,
 explain the effects of registration,

 explain the meaning of the certificate of incorporation, and

 describe the procedure for obtaining the certificate of commencement of
business
 describe finance, money, credits and identify how to source for finance for
the running of a company/business

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WK Outline Objectives Course learning outcomes
5 a) Insurance, national The objectives are to; Students should be able to;
policies, GNP  Expose the students to  Describe in detail the
growth rate and the concept of concept of insurance,
prediction. insurance, national national policies and
policies, GNP growth GNP in relation to
a) Organizational rate and prediction economic growth and
management and  Discuss with the prediction
Management by students the general  Demonstrate an
objectives concept of understanding of
organizational organizational
management, all the management by
processes and types, describing all its
especially processes and types
management by  Identify the peculiarity of
objectives management by
objectives to ensuring
employee productivity in
an organization 5
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WK Outline Objectives Course learning
outcomes
6 General Recap The objective are to; All student should be
and Test 1 • do a recap of able to complete their
previous 1st continuous
discussions, assessment (quiz,
• administer and assignment and mid
coordinate test 1 semester test)

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• DELIVERY METHOD: Lecturing (Teaching) and Educator-student Interaction
Method.
• TEACHING AIDS: Visual Aids (Use of PowerPoint Slides, Lecture Notes), Audio-
visual Aids (Use of Video)

• PREREQUISITE: GEC 321

• RECOMMENDED TEXT:
1. Peter Stokes, Neil Moore, et al. (2016). Organizational Management (1st Ed. Kogan
Page). Https://[Link]/Book/1589652/Organizational-management-
approaches-and-solutions-pdf
2. Chidi E. Halliday and Briggs, Krakrase Kemuel Nelson. (2018). Formation of
Companies Under Company Law Jurisprudence in Nigeria: Lessons from other
Jurisdictions. The Journal of Jurisprudence and Contemporary Issues Vol 10 No. 1,
March 2018
3. Cac. Https://[Link]/Wp-content/Uploads/2020/12/CAMA-NOTE-
[Link].
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 INTRODUCTION

COMPANY -a company or a business firm is an

organization owned and operated by individuals that
specialize in production where the product could be goods
or services or both.

Examples of business firms whose products are in the

form of goods include: wapco, cadbury and peugeot.

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 Examples of businesses whose products are pure
services include: CMFB and Covenant University, etc.
 The engineering business cuts across many dimensions.
It could render services. It could also produce goods
that would be marketed. It could also be a combination
of goods and services.

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 Definitions of company
 Basically a company is the voluntary association of persons
formed for the Purpose of earning profit with investment of
capital.
 A company is a artificial legal entity formed by a group of
individuals to work together & operate towards achieving a
common objective.
 A company can be form by doing legal registration under the
companies act (CAMA)
 It may also be defined as an incorporated association which is
an artificial Person created by law, having a separate legal
entity with a perpetual succession and a common seal.
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ONE PERSON COMPANY
This is more like a processed version of proprietorship.
In a sole proprietorship, a single individual starts the firm, owns
it, and is entitled to all of the profit after taxes.
Most business firms are sole proprietorships. this is because they
are the easiest form of business to start. in many cases, the owner
just begins doing business.
For tax purposes, the firm’s profit is simply treated as part of the
owner’s personal income and is subject to the personal income tax.

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Characteristics
I. Single ownership
Ii. One man control
Iii. Undivided risk
Iv. Unlimited liability
V. No Separate entity of the business
Vi. No government regulations

Advantages of Sole Proprietorship:

• Simplicity
• Quick Decisions
• High Secrecy
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• All Profits Are Subject To The Owner
In summary,
• There is very little regulation for proprietorships
• Owners have total flexibility when running the business
• Very few requirements for starting—often Only A Business License

DISADVANTAGES:
• Limited funds
• Limited skills
• Unlimited liability -owner is 100% liable for business debts
• Equity is limited to the owner’s personal resources
• Ownership of proprietorship is difficult to transfer
• No distinction between personal and business income
• Uncertain life of the business
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PRIVATE COMPANIES

These are companies whose articles of association restrict the free

transferability of shares. In terms of members, private companies
need to have a minimum of 2 and a maximum of 200. They are
usually referred to as partnership businesses.

Partnership: This is an association of two or more persons —

maximum 10 in banking business and 20 in non-banking business.
A partnership requires a formal agreement known as “partnership
deed” to be signed between the partners.

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• in a partnership, responsibilities are shared among several co-
owners. partnerships are common among professionals, such as
doctors, lawyers, and architects.
• larger financial resources - shared resources provides more capital
for the business
• Ease of formation- a partnership is easy to form as no
cumbersome legal formalities are involved
• similar flexibility and simple design of a proprietorship

Although sole proprietorships and partnerships are easy to create,

they share two problems that ultimately make many owners decide
against them. 16

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• Unlimited liability: In either of these types of businesses, each
owner is held personally responsible for the obligations of the firm.
if the business runs up debts and closes down, or is successfully sued
for a large sum of money, the owners will usually have to honor
these obligations out of their own pockets.
• The second problem is the difficulty of raising money to expand the
business. others demerits include;
• limited resources
• public distrust
• lack of harmony
• selling the business is difficult—requires finding new partner
• lack of continuity /partnership ends when any partner decides to end
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it
PUBLIC COMPANIES:
• In contrast to private companies, public companies allow their
members to freely transfer their shares to others.
• Secondly, they need to have a minimum of 7 members, but the
maximum number of members they can have is unlimited.
• They usually referred to as corporations
Corporation:
• In this type of firm, ownership is divided among those who buy
shares of stock. each share of stock entitles its owner to a vote for the
board of directors, which in turn hires the corporation’s top
managers. and each share of stock entitles its owner to a share of the
corporation’s profit— some of which is paid out as dividends.
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Characteristics of a corporations
 Incorporated association
 Artificial person
 Separate legal entity
 Perpetual succession
 Common seal
 Limited liability
 Number of members
 Transferability of shares 20/04/2023 19
 Incorporated association: a company is a registered association. Under
the companies act, it is necessary for a company to be registered, i.e., it
needs to be incorporated.
 Artificial person: A company is an artificial person because its birth is
not natural, but created by law. Being an artificial person, it cannot take
and oath, be imprisoned or personally appear in court of law. However,
like a natural person, a company can buy and sell properties, make
agreements or enter into a contract.
 Separate legal entity: A company is separate from its members, it can
enter into any contract without any of its members, buy property in its
name, borrow or lend money or file a suit in the court of law against any
third party.
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 Perpetual succession: members may come and go, but the company
continues as the same. Its existence is not dependent upon that its
share holders or directors. The shareholders or the directors might
change but the company goes on.
 Common seal: a common seal is the metallic seal of the company. It
is the signature of the company to any document. Each is required to
have only one seal on its incorporation. It is to be used in the manner
prescribed by CAMA
 Limited liability: The liability of the share holders of a company is
limited. In the case of financial loss, the liability of members will be
limited to the amount of unpaid of their shares and their personal
property cannot be used to pay off the debts. 20/04/2023 21
 Number of members: The minimum number of members in a
public company is seven and maximum can be infinite. However,
for private company, the minimum is 2 and maximum is up to
200.
 Transferability of shares: In a public company, the shares can be
transferred freely and in private company also the shares can be
transferred but with some restrictions (shares are not freely
transferrable).

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 Advantages
• the corporate form of organization makes it easier to raise
additional funds: the corporation simply sells additional shares of
stock, thereby bringing in new owners.
• limited liability: the owners (stockholders) of a corporation can
lose only what they have paid for the stock they own;
• public trust: people are less hesitant to become co-owners.
• can be transferred to new owners fairly easily
• profits and losses belong to the corporation

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 Disadvantages of corporations
 It has additional costs. To set up a corporation, government
documents must be filed, and lawyers and accountants are usually
hired to help with the job. And once you incorporate, you are
subject to a variety of laws and regulations that apply only to
corporations.
 Corporate operations are costly and more complex
 To start a corporate business requires complex paperwork

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 Finally, owners of corporations suffer multiple taxation. First, the corporation
pays taxes on its total profit (corporate tax). Then, shareholders pay with-
holding tax; finally, employees must pay income taxes on the portion of profit
they receive as dividends.

 Each Naira of profits is thus taxed at least twice: once as corporate profits and
again as household income.

NOTE: For the largest firms, the advantages of incorporating out weigh the
disadvantages. Although only a minority—about 20 percent of businesses choose
to be corporations, they tend to be large firms, producing about 90 percent of our
national output (see Figure2).

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Fig.2 20/04/2023 26
 ASSIGNMENT1

i. What are the possible CSR that an engineering firm could embark upon?

ii. Do you think the imposition of CSR on companies is justified judging from the
fact that these firms already pay heavy income tax to government? Discuss.

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What is formation of company
A company is formed when a group of people come together
with a view of forming an association to exploit the business
opportunities by bringing together; men, material, money and
management.

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STAGES IN THE FORMATION OF A COMPANY
The formation of a company is a lengthy process. It involves the
following three stages:
1 Promotion
2 Registration or incorporation, and
3 Commencement of business
Each of the above stages comprises specific activities to be
undertaken.

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1. Promotion of a company:
The promotion of a company refers to all those steps which are
taken from the time of having an idea of starting a company to
the time of actual starting of the company business.
Promotion stage includes;
 Discovery of business opportunities
 Detailed investigation
 Assembly of necessary requirements
 Financing of proposition

Company Promoters
These are persons who think of forming a company and take necessary steps
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in its formation.
Selecting company name
To be identified for legal and business purpose (Ltd,
Plc, etc), the name should be unique and not similar to
an existing

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2. Incorporation
A company becomes incorporated when the necessary documents; MoA,
AoA and written consent of all the directors have been delivered to the
Registrar, scrutinized and the requisite fees paid, obtains Certificate of
Incorporation.

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Memorandum of Association
 It defines the objectives for which the company is being formed. The
memorandum by its clauses, describes the whole character of the company. This
includes its objectives, its name, the nature of its liability, the address of its
registered office etc.
 The memorandum defines the powers of a company and its relations with third
parties.
 Its regulates the external affairs of the company

NOTE: The MOA must be signed by at least seven persons in the case of
public company and two in the case of private company

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Articles of Association
 The articles of association contain the rules and regulations for managing the
internal affairs of the company and, therefore, govern the relationship between
the company and its members.
 A private company must prepare its own articles because the articles impose
restrictions on the right to transfer shares, prohibit invitation to the public to
subscribe to its share capital and limits membership.
 Whereas, there are exceptions with clauses for public companies
 AoA should be signed separately by subscribers and they should also be attested by a
witness.

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CONTENTS OF AOA
 Division of shares
 Procedure for holding and conducting meetings
 Voting rights of members and rules regarding methods of voting
 Matters relating to appointment, powers, duties, qualifications and remuneration
of directors
 Methods of increasing or decreasing capital
 Rules regarding common seal of the company
 Methods of securing loans
 Rules relating accounts, audit charging of depreciation and creation of reserves
etc.

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Raising of Share capital
• Entering onto an agreement with underwriters
• Applying to the stock exchange for listing of shares
• Issues of prospectus inviting public to subscribe
• Allotting shares

Prospectus of association: This refers to any document described or issued

as a prospectus inviting deposits from public or inviting offer from public
for the subscription or purchase of shares or debentures of the company.
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Contents of Prospectus of Associations
• Date of issue of prospectus
• Name and register office
• Consent of central govt. for the present issue in compliance with guidelines
• Voting rights, dividends, expenses on issues
• Name of stock exchange
• Punishment for fictitious application
• Refund of issue if 90% minimum subscription not received
• Names and addresses of leading managers

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 3. COMMENCEMENT OF BUSINESS
 Basically a company comes into existence when it receives the certificate of
incorporation.

 A private company can commence its business immediately after receiving

the certificate of incorporation. But, a public company will have to obtain
another certificate known as the 'certificate to commence business' before it
can start its business.
 However, a public company having no share capital can also commence
business immediately on receiving the certificate of incorporation. It, therefore,
follows that a public company having share capital, is required to fulfil some
more formalities before it obtains the certificate to commence business.

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Sources of Finance, Money & Credit
Outline
 Introduction-Finance and money
 History of money
 Sources of money
Self funding
Banks
Insurance
Shareholders/Investors
others
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3
 Introduction
Finance generally oils the wheel of business, without which the
business will grind to a halt.

Finance entails money management and the process of

acquiring needed funds. it involves processes such as
investing, borrowing, lending etc.- [Link]
Finance- means the management of large amounts of
money, especially by governments or large companies.
"the firm's finance department“ - wikipedia

What is money?
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Money is any item or verifiable record that is generally accepted as
payment for goods and services and repayment of debts, such as
taxes, in a particular country or socio-economic context.
basically, it is something generally accepted as a medium of
exchange, a measure of value, or a means of payment-merriam
webster
the source, cause and flow of money has been a mystery for
thousands of years
money is any medium of exchange
measure of value
store of value

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Brief History of Money
• it originated in babylon (1792 -1750 bc)
• medium of money in past ages include: shells, live stock, land, precious stones,
skulls, pearls, wheat, feathers, brass, silver, gold, paper money (which was
discovered and reported by Marco Polo after he returned from china in 1295)

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• In modern age, medium of money includes paper money, cheque, bearer bonds,
stocks, credit cards and e-money.

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• modern money was created to facilitate trade and prevent economic
depressions which plagued the world beginning from 1929.
• due to inflation, the gold standard was adopted as real money because the
value of gold was found to be stable across generations.
• banks were required to give out paper receipts when gold is deposited.
they were also required to return the gold on demand.

• USA became bankers for global gold after WWII. other countries agreed
because they were nearly bankrupted by costs of war and USA underwrote
the costs of the war.
• global money rules were set by the USA after world war ii using the
Bretton woods institutions (IMF, WB & WTO) as independent
administrative organizations (i.e. they are not subject to un).
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• however, the gold standard was finally abandoned in 1971 by
president nixon and the us dollars became the world gold.
• the global gold, however, is still stored in fort knox
• a single gold bar weighs 11.34 kg and costs ($1,489/kg x
11.34kg) = $16,887

• in 1945, it cost $35 for every 28 grams. today, it is worth

$1,704.76
• gold at fort knox = 4,578,630 kg or 4,580 tons
• valued at about 5.6 billion euros

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• Individuals willing to begin an engineering business must
know how to source for money by understanding the
strengths and weaknesses of different sources.

• The most common and legally recognized means of

obtaining funding for engineering projects are self, banks
and shareholders/investors.

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 Sources of Finance
 Sources of finance can either be;
• informal (internal) sources: financing from non-financial
organized institution like personal savings, family and friends,
donations etc.
• formal (external) sources: is borrowing from financial
institutions such as banks and credit unions, and other non-bank
financial institutions.
note; both informal and formal finance have their strengths and
weaknesses!

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1. self funding
• advantages
i. unnecessary high interest rates associated with borrowing is avoided.
ii. the time wasted in applying for loan is saved.
iii. the financier has total control of the decision making processes regarding the
project.

 disadvantagesof self funding

i. personal/private responsibilities may be competing with the available money.
ii. all the risks of the project are directly tied to the financier.
iii. the sole financier lacks access to genuine objective views.

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2. Family and friends, cooperative societies and religious
organizations’ welfare funds.

Advantages:
• low or zero interest rates may be charged,
• they are less strict about the due date of refund etc.

Disadvantages
• only small sums of money can be obtained from these sources.
• if funds are lost in the business, precious relationships may be
damaged.
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 Formal Sources of finance
Since formal sources of finance is borrowing from financial institutions such as
banks and credit unions, and other non-bank financial institutions. They are
classified based on repayment period as follows;

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Banks
• Can Be Classified Into:
Central Bank,
Commercial Banks,
Cooperative Banks
Investment Banks
Savings Banks,
Agricultural Banks
Offshore Banks/Exchange Banks
Merchant Banks.

 The Banks That Best Serve The Purpose Of The Engineering

Entrepreneurs Are The Commercial And Merchant Banks.

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main sources of short-term finance
• bank overdraft: bank overdraft is available to holders of current accounts
only. the bank usually allows the customer to issue cheques in excess of the
customer’s balance that the bank simply pays. the bank normally charges
interest on outstanding overdrawn balance on overnight basis.

• commercial paper: this is an instrument that allows the business to raise

money from third parties rather than from banks directly. they are unsecured
debt notes and are issued through the banks. maturity of a commercial paper is
normally less than 270 days but most are issued for 180 days.
• trade credit: it is created when the business purchases goods for resale or
manufacture and the seller allows a period of credit. this often comes without
any formal agreement between the company and the seller. suppliers only need
to be assured of the credit worthiness of the business to be allowed the credit
facility.

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Main sources medium-term finance
• bank term loan: bank term loan are medium term source of
financing in that its maturity ranges between 3-5years. the period
could be longer in certain cases. the repayment of this loan involves
a periodic instalment payment over the entire loan period.
• venture capital: this is a medium term finance that involves
provision of finance for a new business process or system. it is also
common for businesses undergoing a re-engineering or restructuring
program. venture capital is normally provided by rich and
comfortable organizations.
• project financing: this is usually the funding of a project directly
by a financial institution. the proceeds from the project are sufficient
to repay the capital {the principal} amount with interest.
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main sources of long-term finance
• bonds: this is an instrument commonly used by companies to raise
funds on long-term basis. it is a long-term promissory note issued
by the firm with maturity of more than 10 years. it is a certificate
issued by a company promising to pay back borrowed money at a
fixed rate of interest on a specified date.
• loan stock: long-term debt capital raised by a company for which
interest is paid, usually half yearly and commonly at a fixed rate of
interest irrespective of the value of the stock on the market.
others include preference shares and ordinary shares/stock

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The disadvantages of this source of funding include:
 high interest rates may be charged
 collaterals are demanded before money is released
 processes may be delayed due to verification of claims
and
 collateral may be forfeited if the money is not returned
to the bank as agreed.

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insurance companies
• These companies are also classified as financial institutions but
not as banks because they do not lend money to entrepreneurs.
• however, they make money available to cover business, personal
and other types of risks.
• they agree to underwrite the costs of offsetting a particular kind
of unforeseen liability that may arise in the course of doing
business in exchange for a regular contribution of premium to the
insurance firm.
• some countries make it mandatory that businesses obtain some
form of insurance policy for the enterprises in order to protect,
the investors’ funds, workers’ lives and health and a variety of
other issues.
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3. Investors/shareholders

• these are individuals who have spare money to lend to

businesses
• the difference between this source of money and bank as
a source of money is that banks do not co-own the
business with the borrower while the
investor/shareholder is a co-owner of the business for
which the money is intended.
• investors make their money available either through the
stock market or through private placement.
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The advantage
• risks are shared i.e. investors do not ask for a fixed interest rate
upfront. they wait till the profits are coming in and they take what is
known as dividends.

Disadvantage
• decision taking is done by votes
• this limits the powers of the original owner of the business idea.
• the investors’ primary interest is in securing their own capital while the
business owner is after actualizing a dream which is not necessarily
instant financial gains.
• examples of engineering entrepreneurs who began their businesses
with funds from investors include henry ford and honda.
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 THANK YOU!
BEWARE OF LITTLE EXPENSES; A SMALL LEAK WILL SINK A GREAT
SHIP!

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