Capital in business and corporate finance refers to anything that a company or its owner can employ to create more value. Capital is used by accountants, economists, and investors to assess the performance and health of a business, corporation, or economy. To provide a complete picture of a company’s net worth, the financial statements of a company must account for all sources and types of capital.
What is Capital?
Capital provides benefit or value to the business such as a factory with its machinery, financial assets of an individual or business, intellectual property like patents. Capital is money used to make more money. Broadly, money forms a part of the capital, but capital is also associated with cash used for investment and growth purposes in a business. In a line – capital is essential for running everyday operations and the company’s financial growth. It covers all the elements like buildings, land, money, machinery, materials, etc., that are used by a business. Business capital can be derived from the activities of a business or can be raised through equity financing or debt.
Sources of Capital
- Tangible Assets: Physical assets such as buildings, machinery, facilities, required to manufacture a product or render a service.
- Brand capital: Brand capital refers to the social value that a company generates from its product/services, i.e., the perceived value of the brand
- Financial Assets: Assets that can be liquidated like cash, cash equivalents, marketable securities, etc.
- Human capital: People working in the business organization to produce goods or provide services.
Structure of Business Capital
Every company assesses the perfect mix of equity, assets, and liabilities while keeping in account the cost of capital, the risks involved, tax opportunities, and the ability to raise capital. This perfect mix forms the structure of business capital. Once the business gets the perfect debt to equity ratio in the capital structure, it can start using its capital to make investments that will ensure profitability and growth.
When it comes to reporting it on the balance sheet, the sum of capital and total liabilities is equal to the total value of the assets of a business. Capital is tied to where the money is generated internally, whereas liabilities show from where a firm generates money outside the business. On the other hand, assets show how the company uses its capital for generating revenue.
Types of Capital
Businesses use four common ways to gather capital. It can be used to fund the launch of a company or help a business through the growth period. For any business, working capital, debt and equity capital are the major sources of capital. Trading capital is found only in the financial industry. Let us look at each one of them in detail.
Working Capital
Working capital is a business’s ability to generate cash for paying its short-term financial obligations. It reflects a company’s ability to take care of its accounts payable, debts, and obligations that need to be covered in a year.
Working Capital = Current Assets – Current Liabilities
Debt Capital
When a business acquires capital by borrowing from government or private sources, it refers to as debt capital. This can mean borrowing capital from banks, financial institutes, credit cards, friends, family, or issuing bonds. Businesses should have an active credit history to acquire debt capital, and it requires regular repayment that comes with interest.
Equity Capital
In simple terms, equity capital or equity share capital is the capital raised by selling shares. The main difference is whether those shares are sold privately or publicly.
- Private shares are shares of stock within private groups of investors in a company.
- Public shares are the company’s shares of stock listed on the stock exchange.
An investor provides equity capital to a company by paying for the shares of the company. In exchange, they are entitled to receive income in the form of dividends.
Trading Capital
It only applies to the financial industry, where brokerage companies support their investment strategies through enough capital. Trading capital is used by brokerage companies and big brokerage firms to support the many daily trades and large-scale trades to generate profits. It can be granted to individual traders or a firm as a whole.
What is Capital in Economics?
Capital, meaning in economics, refers to tangible assets like equipment and machinery used for producing goods. Capital generally defines the financial strength and wealth of a company or individual. When talking in terms of the economics of global scale, it is the money in circulation used for everyday operations or long-term projects.
What is Capital in Business?
Capital, meaning in business terms, reflects the money it has for funding everyday operations with funds available for business expansion in the future. The capital assets in business terms can include cars, real estate, investments (long term or short term), and other valuable items. A business can also possess capital assets which include machinery, warehouse space, inventory, patents, office equipment, etc.
Also, a business that totalled up the capital would include all the items owned by the company with its financial assets without the liabilities. It is different from an accountant who is handling the everyday budget of the business as they would consider only the cash available in hand as the capital.
What is Capital in Finance?
Although capital at its core is money, in financial terms, it is viewed as an investment for the future and a requirement for current operations. It is measured in terms of money used for making products or providing services by the business. For example, the money in your wallet is not capital until you use it to earn more money. Capital has higher durability than money as it can be reinvested in order to earn more value.
The Bottom Line
As seen above, capital has different meanings depending on the context. It is reflected as money available for everyday operations or launching a new initiative on a balance sheet. It can further be categorised as debt capital, equity capital, or working capital, which depends on the intent and origin of use. Also, it includes all the valuable possessions like real estate and equipment when the overall capital assets of a company are defined. Economists look at capital as the circulation of cash within the entire economy.