Capital is a broad term that can describe anything that confers value or benefit to its owners, such as a factory and its machinery, intellectual property like patents, or the financial assets of a business or an individual.
While money itself may be construed as capital, capital is more often associated with cash that is being put to work for productive or investment purposes. In general, capital is a critical component of running a business from day to day and financing its future growth.
Business capital may derive from the operations of the business or be raised from debt or equity financing. When budgeting, businesses of all kinds typically focus on three types of capital: working capital, equity capital, and debt capital. A business in the financial industry identifies trading capital as a fourth component.
What is capital?
Capital refers to financial assets, such as funds in the form of deposit accounts and funds got from special financing sources. Capital can also be relatable with the capital assets of a company that requires a significant capital contribution to finance or develop.
Capital can remain as financial assets or be raised from debt or equity financing. Businesses mostly have three options for business capital: working capital, equity capital, and debt capital. In general, business capital is the essence of running a business and funding capital intensive assets.
Capital assets are those assets of a business which include the current or long-term portion of the balance sheet. Capital assets include cash, cash equivalents, and marketable securities as well as plant and equipment, production facilities, and storage facilities.
Why is capital important?
Production without capital is not possible. Elaborate tools and sophisticated equipment are required for modern-day production.
It increases the productivity of employees and in turn, the economy as a whole. Importance to technology and specialisation alongside a growing population has left manufacturers to arrange for more capital and allied resources to fulfil the demands.
Capital accumulation is said to be the core of economic development. The economy may be a free enterprise economy found in America or a socialist seen in Soviet Russia or a mixed economy like that of India. Irrespective of these types, economic development needs critical ingredient, such as capital formation.
Capital helps in creating employment opportunities. Workers are employed to produce capital goods as well as consumer goods.
Business Capital Structure
A company’s balance sheet provides for metric analysis of a capital structure, which is split among assets, liabilities, and equity. The mix defines the structure.
Debt financing represents a cash capital asset that must be repaid over time through scheduled liabilities. Equity financing, meaning the sale of stock shares, provides cash capital that is also reported in the equity portion of the balance sheet. Debt capital typically comes with lower rates of return and strict provisions for repayment.
Some of the key metrics for analyzing business capital are weighted average cost of capital, debt to equity, debt to capital, and return on equity.
FAQs
Money vs. Capital?
While money (currency) and capital may seem like the same thing, they are not. Capital is a much broader term that includes all aspects of a business that can be used to generate revenue and income, i.e., the company’s people, investments, patents, trademarks, and other resources.
Money is what’s used to complete the purchase or sale of assets that the company employs to increase its value.
Types of Capital?
1. Financial
- Equity
- Debt
- Investments
- Working capital
2. Human
- Social
- Intellectual
- Physical
- Talents/skills
3. Natural
- Commodities
- Animals
- Vegetation
- Ecologies