If an organization’s mission is to make money, it will try to maximize the profits of the company by increasing the money coming in or decreasing the money going out. The flow of money is called cash flow. Money coming in is positive cash flow, and money going out is negative. The company can maximize profits by improving its operational efficiency or by executing projects. The company must raise money to fund projects. Companies can raise money in three ways:
- Borrow it (government organizations, such as cities and schools, can sell bonds, which is a form of borrowing).
- Fund the project from existing earnings.
- Sell additional stock or ownership shares in the company.
If a company borrows money, it must pay back a portion of the amount it borrowed plus additional interest. The interest is a percentage of the amount of the loan that has not been repaid. The repayment of the loan and interest is usually paid quarterly or annually. To qualify for selection, a project that is intended to make or save money must be able to do the following:
- Repay loans if money must be borrowed to fund the project
- Increase future earnings for shareholders
- Make the company stock more valuable
When senior managers at a for-profit company decide which projects to fund, they must consider these economic issues.
- 744 reads
