wondering: What Is Capital?
What does capital mean in business?
What’s crucial to know?
In this article, I will break down the question “What Is Capital” so you know all there is to know about it!
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Table of Contents
What Is Capital In Business
In business, capital is a term used to refer to an asset, resource, or something that provides its owner with a value of some kind or benefit.
For example, capital refers to cash, financial assets, tangible resources, intangible resources, etc.
There are four main types of capital: debt capital, equity capital, trading capital, and working capital.
Depending on the company’s capital structure, the company will have more or less one type of capital on its balance sheet.
It’s important to keep in mind that debt capital is recorded as a liability on a company’s balance sheet.
From a technical point of view, “capital” can be defined as anything a business can use to generate more value for the business.
In other words, capital can refer to cash, cash equivalents, financial securities, real property, intellectual property, and other investments.
Companies and businesses typically account for their various means of capital on their financial statements, such as balance sheets and income statements.
By definition, when a company can use its capital to generate further capital, it will result in capital gains for the business.
However, if the business is unable to translate its capital to more capital and ends up losing, the company will suffer capital losses.
Capital vs Money
What is the difference between capital and money?
Most people think of capital as “money”.
In fact, fundamentally, money is a form of capital.
While money refers explicitly to currency, capital is a broader term that refers to anything that could provide its owner with value.
A company actively uses capital to generate profits and create more value.
In essence, from a business perspective, capital is viewed as a company’s current assets, current operations, and investments to generate more capital in the future.
On the other hand, money is a physical currency used to acquire other goods and capital.
Money can be used to purchase assets and resources to generate profits.
Types of Capital
Businesses can use four types of capital to create value for their stakeholders and clients: debt capital, equity capital, trading capital, and working capital.
Debt capital is any type of capital borrowed by one party from another.
For example, when a company takes a loan from a bank or a financial institution, the loan is referred to as debt capital.
Debt capital is typically a means of providing additional cash to a company, but at the same time it will be recorded as a liability on its balance sheet.
In most cases, companies that take on debt capital will have to pay back the lender the principal along with interest according to the terms of the lending agreement.
Equity capital is a type of capital that refers to assets a business can acquire by selling shares in its share capital or equity interests.
For example, a publicly-traded company can sell shares on the open market to raise the capital it needs to fund its business operations.
A private company can sell shares to private investors raising the capital it needs to fund the growth of its business.
Trading capital refers to a company’s financial reserves assigned to trade securities like equity securities or debt securities.
Trading capital is an important function of large financial institutions where they rely on their trading capital to fund their business needs in different economic cycles.
Working capital refers to the assets immediately available to a company allowing it to produce goods and generate sales.
Working capital is typically highly liquid such as cash in the bank account, cash equivalents, accounts receivables, and other short-term assets.
Working capital can also refer to any type of asset a company uses to generate profits, such as raw materials, equipment, inventory, and other resources.
How Capital Is Used
Every day, companies use capital to produce goods and services allowing them to generate more sales and, ultimately, profits.
A company can use the different types of capital at its disposition to acquire other types of capital.
For example, a company will use its cash and cash equivalents to purchase raw materials, equipment, and machinery to produce a certain type of goods.
Every profit-seeking organization looks to invest capital to generate more capital.
A company can look at its internal capital distribution to better assess how to scale and mitigate against business risk.
For example, a company that does not have a high level of debt on its balance sheet may choose to obtain debt capital to purchase a real estate property or a manufacturing plant.
On the other hand, a company that has a lot of debt on its balance sheet may choose to raise capital by selling equity securities.
Every company should assess its capital structure to determine the most optimal way it can use its existing capital to acquire additional capital.
Capital Gains And Losses
All profit-seeking companies are in business to generate profits.
When you invest capital to create value, you are creating additional capital.
You end up with capital gains when your capital increases following your investments.
For example, if you invest $100,000 to buy a particular machine and sell it for $150,000, you effectively generate $50,000 in capital gains.
On the other hand, when you make investments that end up losing value, you end up with capital losses.
For example, if your company purchases a real estate property for $1,000,000 and sells it for $600,000, you effectively generate $400,000 in capital losses.
Let’s look at a few examples of capital used by businesses to create value for their shareholders.
Financial capital refers to cash and cash equivalents that businesses use to fund their business operations.
You can also count a company’s accounts receivables as financial capital.
When the company’s clients pay their invoices, the accounts receivables are reduced and the cash accounts balances are increased.
Human capital refers to a company’s employees, contractors, and representatives that have the skills and knowledge to produce goods and services and to help operate the company.
A company’s human capital allows the company to produce value.
Intellectual Property Capital
Intellectual property capital refers to a company’s intangible capital proprietarily developed by the company.
A company will use its intellectual property to gain a competitive advantage over its competitors and use these assets to generate a greater level of profits.
Physical capital refers to any type of physical goods a company may use to generate profits.
Physical capital can include assets used to produce goods, raw materials, inventory, machinery, equipment, and other physical assets.
Real Estate Capital
Real estate capital refers to a company’s real estate properties, spaces, and assets.
A company may have a production plant, warehouse, office space, factory, or other real estate property allowing it to operate effectively.
Securities capital refers to the different types of securities, like equity and debt securities, used by the company to finance its operations.
When a company sells equity securities, it raises capital by selling shares of the business.
When a company sells debt securities, it borrows money from lenders and will have to pay back the principal along with interest.
What Is Capital FAQ
What does capital mean in business?
In business and corporate finance, capital means any asset, goods, or resources used by a company to create value.
For example, a company can use financial capital to fund the purchase of equipment and raw material to produce goods and generate a profit.
What does capital mean in economics?
Economic capital refers to how much the economy is producing and how much consumers are spending.
Capital includes things like personal income measures, personal consumption metrics, capital investments, the economy’s Gross Domestic Product, and other economic indicators of capital flow within the economy.
What are the different types of capital?
There are four main types of capital:
- Equity capital
- Debt capital
- Trading capital
- Working capital
Is money considered capital?
Money is fundamentally capital.
However, capital is not necessarily money.
Money refers to a currency that can be used to purchase goods or services.
However, capital is anything that can be used by a company to create value.
So there you have it folks!
What does capital mean?
In business, capital is considered to be anything that you can use to generate value.
For example, you can use intellectual property to create value, that’s capital.
You can use physical machines and equipment to produce goods, that’s physical capital.
You can use skilled workers to provide services, that’s human capital.
You can use financial capital to invest in profit-generating assets.
In essence, capital can be described as anything providing value to a company.
Now that you know the meaning of capital, the different types, and why it’s important, good luck with your research!
I hope you enjoyed this article on What Is Capital! Be sure to check out more articles on my blog. Enjoy!
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