Capital Structure and Projects

Going back to the discussion of the balance sheet in Chapter 3, we know that assets on the left side are "paid for" or "financed" by liabilities on the right side. Owners, shareholders, debt holders, and suppliers are the creditors of the business. The relative weight of debt and owner capital paid in is called the "capital structure" of the company. Generally speaking, the long-term debt (like capital leases, notes and bonds, and capital paid in for stock or partnership) finances the long-term capital purchases; short-term debt (such as accounts payable to suppliers) finances the short-term assets (like accounts receivables).

For project managers, the importance of the capital structure is this: there is a "cost of capital" that is passed along to the project. For the most part, the cost of capital is not a real expense that shows up on an expense statement, but it is an "opportunity cost" that creates competition for capital. If the project loses out in the capital competition, the project is starved of the resources it needs or the project is never approved in the first place.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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