8.1 Functions of Money

Money serves several essential roles that enable smooth economic transactions and efficient resource allocation. In Kenya’s procurement landscape, where timely payments, budgeting, and contract management are vital, appreciating the functions of money helps procurement officers optimize financial dealings and maintain transparency. The following subtopics delve into the primary functions of money and their relevance to procurement management.

8.1.1 Medium of Exchange

Money as a medium of exchange means it is widely accepted in return for goods and services, eliminating the inefficiencies of barter systems. In procurement, money facilitates purchasing goods and services from suppliers without the complications of direct barter, which requires a double coincidence of wants.

Characteristics that make money an effective medium of exchange in procurement include:

• Universally accepted: Money is accepted by sellers across various sectors, enabling procurement officers at county government offices to buy from diverse suppliers without negotiation on the medium.
• Standardized value: Money provides a consistent measure of value, allowing procurement professionals at retail businesses to compare prices uniformly.
• Divisible: Money can be divided into smaller units (coins and notes), which helps in transactions of varying sizes from bulk purchases in hotels to small orders in clinics.
• Portable: Money is easy to carry and transfer, enabling procurement officers at SACCOs to make payments conveniently across branches.
• Durable: Physical money or electronic money retains value over time, ensuring procurement contracts can rely on stable payment methods.

In Kenya, the widespread use of the Kenyan shilling (Ksh) as a medium of exchange simplifies procurement transactions in both urban and rural areas, reducing delays and enhancing business efficiency.

8.1.2 Unit of Account

Money functions as a unit of account by providing a common measure to value goods, services, assets, and liabilities. This role is critical in procurement where price comparisons, cost analysis, and budgeting depend on a uniform standard of value.

Importance of money as a unit of account in procurement management:

• Facilitates price comparison: Procurement officers at hospitals like Kenyatta National Hospital use money to compare quotations from suppliers effectively.
• Simplifies record keeping: Keeping financial records in monetary terms allows county government procurement units to track expenditures accurately.
• Enables budgeting: Procurement managers at universities prepare procurement budgets using money as a common unit to allocate funds for various departments.
• Supports contract valuation: Contracts are priced in monetary terms, ensuring clarity and enforceability in agreements with suppliers.
• Assists financial reporting: Organizations such as insurance firms report procurement expenses in monetary units, aiding transparency and accountability.

The Kenyan shilling’s stability is vital for procurement professionals to plan and execute purchases without frequent adjustments due to volatile valuation.

8.1.3 Store of Value

Money serves as a store of value by preserving purchasing power over time, allowing individuals and organizations to save and defer consumption or investment. This function is particularly relevant in procurement for managing funds earmarked for future purchases or contingency reserves.

Key aspects of money as a store of value in procurement:

• Preserves purchasing power: Procurement units in county governments retain funds in monetary form to buy supplies at a later date without losing value.
• Enables savings: Supplier payments can be scheduled based on stored funds, helping cooperative societies manage cash flow efficiently.
• Facilitates investment planning: Procurement managers at banks allocate funds in monetary terms to invest in bulk procurement to benefit from discounts.
• Supports contingency management: Money stored as reserves allows prompt response to emergency procurement needs in hospitals.
• Involves risk of inflation: While money stores value, inflation in Kenya can erode purchasing power, requiring procurement professionals to consider inflation in budgeting.

Procurement officers must balance holding money to preserve value and timely spending to avoid losses due to inflation or currency devaluation.

8.1.4 Standard of Deferred Payment

Money’s role as a standard of deferred payment means it is accepted to settle debts or obligations payable in the future. This function is fundamental in procurement contracts involving credit terms or installment payments.

Relevance of money as a standard of deferred payment in procurement:

• Facilitates credit purchases: Procurement departments at educational institutions often acquire goods on credit, agreeing to pay in Kenyan shillings at a later date.
• Enables installment payments: Large procurement contracts, such as furnishing county offices, may be paid in installments using money as the agreed standard.
• Provides legal clarity: Monetary terms in contracts define clear payment obligations, reducing disputes between suppliers and procurement units.
• Supports financial planning: Knowing deferred payment schedules in monetary terms helps procurement managers at hotels manage cash flow effectively.
• Encourages supplier confidence: Suppliers trust monetary deferred payments, enhancing willingness to extend credit to reputable buyers.

Kenya’s legal framework supports monetary deferred payments, offering procurement professionals a reliable mechanism to manage supplier relationships.

8.1.5 Measure of Value

Functions of money as a measure of value in procurement include:

• Expresses relative worth: Procurement officers at retail businesses assess the value of different items in Ksh to determine the best supplier.
• Enhances negotiation: Clear monetary values allow for effective price negotiations with suppliers.
• Enables cost-benefit analysis: Procurement managers at county governments evaluate the benefits of goods relative to their prices.
• Supports inventory valuation: Money provides a basis to value stock levels accurately in warehouses.
• Assists in financial auditing: Monetary valuation of procurement transactions facilitates auditing and accountability in organizations like NEMA.

Money’s role in measuring value ensures procurement decisions are based on objective financial data rather than subjective or barter-based assessments.

Chapter Summary

This chapter explored the fundamental role of money in the economy, emphasizing its key functions as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. It also detailed the essential characteristics that make money effective, such as durability, portability, divisibility, uniformity, limited supply, and acceptability. The discussion then shifted to financial institutions, outlining their critical role in mobilizing savings and allocating credit within the economy. The functions of both the central bank and commercial banks were examined, highlighting the central bank’s role in monetary policy implementation, currency issuance, and financial system regulation, alongside commercial banks’ activities in deposit mobilization and credit provision. Finally, the chapter addressed non-banking financial institutions, describing their functions in providing specialized financial services such as investment management, insurance, and microfinance, which complement the activities of traditional banks. Together, these topics provide a comprehensive understanding of money and banking essential for economic operations.