Fund Management – SS3 Marketing Lesson Note (Second Term)

Fund management is the management of the cash flow of an individual, business or financial institution so that receipts and payments are handled in an organised and efficient way.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Explain the meaning of fund management.
2. State the objectives of fund management.
3. Explain the three motives for holding money.
4. List and explain the factors that influence the reasons for holding money.

What is fund management?

Fund management is the effective and efficient investment, financing, application and control of an organisation’s finance.

• Standard definition: it is “the part of overall management devoted to the effective and efficient investment, financing, application and control of an organisation’s resources (finance)”.
• Cash flow: it is the management of the cash flow of an individual, business or financial institution.
• Fund assets: it can also be referred to as the management of fund assets.
• Scope: it is a broad area of finance covering the collection, handling and use of cash.
• Purpose: it helps individuals and businesses to process receipts and payments in an organised and efficient manner.

What are the main activities in fund management?

The main activities of fund management are collecting, handling, using and controlling cash.

1. Plan: estimate the cash expected to come in and go out, for example with a cash budget.
2. Collect: receive money from sales, debtors and other sources.
3. Handle: keep cash safely, for example in a bank account, and record every receipt and payment.
4. Use: pay expenses and invest spare cash where it will earn a return.
5. Control: compare actual cash flow with the plan and correct any gaps.

What are the objectives of fund management?

The objectives of fund management are to make sure money is available, safe and well used.

• Liquidity: enough cash is available to pay bills, wages and suppliers when they fall due.
• Efficient use of funds: money is put to work and not left idle without reason.
• Profitability: spare funds are invested so that they earn a return.
• Safety of funds: cash and investments are protected from loss, theft and waste.
• Control: receipts and payments are recorded and checked against the plan.

What are the motives for holding money?

There are three motives for holding money: transaction, precautionary and speculative.

Transaction motive

• Meaning: the demand for money to meet the costs of the day to day running of the business.
• Examples: expenses on fuel and raw materials, which are variable costs.

Precautionary motive

• Meaning: money held because of unforeseen circumstances that may occur in the production process.
• Examples: money set aside for unexpected breakdown of equipment, repair and servicing.

Speculative motive

• Meaning: money held by the business for investment, so as to make profits.
• Example: money held for the purpose of buying and selling.

What factors influence the reasons for holding money?

Five factors influence why and how much money a business holds.

• Financial strength of the business: a strong business can borrow easily, so it may need to hold less cash for emergencies.
• Rate of inflation: when prices rise, the business needs more money to buy the same raw materials and services.
• The expected future profit: good profit expectations encourage a business to hold funds ready for investment.
• Payment convention: the usual way and time of paying, such as weekly wages or monthly salaries, decides when cash is needed.
• The prevailing interest rates: high interest rates make idle cash costly, because the money could earn interest if invested.

Evaluation

1. Explain fund management.
2. State four objectives of fund management.
3. Explain the transaction, precautionary and speculative motives for holding money.
4. What are the factors that influence the reasons for holding money?

Assignment

A provision store owner in your town holds cash in the shop. Give one example of cash held for each of the three motives, and name two factors that may change the amount of cash the owner holds.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

Lesson closing

The teacher commends the students positively.