Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability

Chapter 5. Project Financing

The objective of this chapter is to acquaint project managers with sources of funding for a given project, explain the implications of the costs associated with the source of funding, and describe the method for calculating the client’s cost of funding. The focus is on funding at the macrolevel, or the effect on the company as a whole. Chapter 6 focuses on the costs of funding individual projects on the micro-level. Regardless of the level, there are two categories of sources for funding: debt (borrowing) and equity. It is important to note that the funding sources are also the sole providers of a company’s assets.

Debt Financing

Borrowing

There are essentially four types of debt financing: borrowing, corporate bonds, trade debt, and customer deposits. The most common type of debt financing is borrowing from financial institutions, such as banks or leasing companies. Borrowing from financial institutions can be quick and relatively inexpensive.

Financial institutions borrow money at one rate and lend it out at a higher rate. The spread between the cost and the amount charged for the borrowing is how financial institutions make money. They do not set out trying to figure out how to make money on a defaulted loan. An organization that does plan to make money on a defaulted loan or places borrowers in a position where they can’t retire their debt is known as a predatory lender.

Most financial institutions are regulated by licensing authorities, which have rules ...