2.10: Corporate Goals
It is well known that in a Capitalist economy, the corporation is said to serve the interests of the owners. (While there may be additional purposes, we shall assume this simple premise.) The owners wish to earn profits, to “make money.” In theory, we shall assume that the owners and, by extension, the corporation has a never-ending appetite for profits and corporate growth. We shall say that the corporation has no interest in vacation, rest, or “doing good,” the lack of which premises may, in fact, be false.
“Growth,” thus, refers to the increase in a corporation’s sales or revenues, which in turn provide increasing levels of profits to the benefit of the corporation’s owners. This brings us to the Balance Sheet. No company can produce sales without assets. It is assets (the left side of the Balance Sheet) that produce goods and services for sale. However, assets must be paid for, or more accurately, “financed” when cash itself is unavailable.
The financing of the company’s assets comes from raising capital in the form of liabilities, including borrowed money, and injections of cash from owners who purchase shares of equity in the corporation when such shares are offered by the corporation. (This is distinctly different from secondary market trading where shares are bought from selling shareholders with no corporate involvement.) Financing sources also include profits which the company retains – “Retained Earnings.”
As the company increases its capital, it is then equipped to acquire more assets with which to increase its sales and profits ad infinitum. Thus, as the balance sheet itself increases, so too does the potential for corporate growth as we define it. Round and round she goes.