What is Capital?
‘Capital’ refers to resources and assets that can generate value—cash, building, land, machinery, equipment, etc. These resources facilitate the production of goods or services. Every firm requires liquid assets to fund everyday business operations—to clear liabilities like salary, rent, utility bills, commission, freight etc.
Every company requires a capital investment, not only for establishment but also for its functioning in the long run. Businesses raise funds from various sources—personal savings, personal loans, business loans, angel funding, issuance of shares, etc.
Table of contents
- Capital refers to assets that facilitate value creation—for the business entity. It includes cash, land, building, equipment, machinery, and tools that are essential for manufacturing goods or services. Liquid assets are required for meeting day-to-day expenses and business operations.
- Capital is further subdivided into types—financial, human, and natural. Financial resources are further classified into debt, equity, working capital, and trading.
- Funds are required at every stage of business—from the establishment to expansion.
- When investments increase, businesses grow. Consequentially, the requirement for skilled labor increases—employment levels rise.
The term ‘capital’ has different meanings in different contexts—depending on usage. For example, in economics, any form of liquid asset which can be easily converted into cash is known as capital. But in business and finance, the same term refers to a sum that is invested in an organization to produce goods and services and create value. In banking, the term refers to net worth or excess assets (over liabilities).
Capital does not always refer to money. The term often represents the net worth of a business or individual. This includes the monetary value of assets—real estate, machinery, equipment, tools, and inventory. It is also represented as the difference between assets and liabilities. On the other hand, money is a universally accepted mode of exchange with a certain face value.
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Let us discuss its different types:
- Financial Capital: Businesses use various financial resources to buy fixed assets like land, building, machinery, equipment, etc. Financial resources are used to pay operating expenses—salary, rent, interest, commission, utility bills, etc.
- Equity Capital: Businesses accumulate funds from investors by issuing stocks—a portion of ownership in the business. These shareholders become co-owners of the company.
- Debt Capital: It is acquired in the form of a business loan, bond issuance, or debenture issuance.
- Working Capital: The firm maintains some cash and liquid assets to fund its everyday business operations. It is required to clear current liabilities and expenses—credit, salary, rent, utility bills, commission, freight, etc. It is computed by subtracting current liabilities from current assets.
- Trading Capital: It is the amount kept as a reserve for undertaking business expansion and investments.
- Human Capital: ‘Human resource’ is considered the most important facet of any business. A company can progress and win over its competitors if it possesses an educated, competent, talented, experienced, and skilled workforce.
- Natural Capital: Businesses use various natural resources to meet energy needs—especially important for goods production. Natural resources include solar energy, water, fossil fuels, wind, animals, plants, wood, etc.
Capital is anything that generates value for the firm. It can be financial, material, human, or natural resources.
In a sole proprietorship or partnership business, the majority of funds are invested personally by the owners—or in the form of personal loans taken from a bank or financial institution. When it comes to larger corporations, funds are raised through debt or by the issuance of equity. Every firm requires funds to undertake day-to-day business operations—and to cover cash flow requirements.
In addition to financial resources, human resource is crucial for long-term growth. Companies that possess skilled and experienced employees can efficiently utilize financial, material, and natural resources to enhance productivity. Thus, human resource is crucial for gaining a competitive edge.
Similarly, access to natural resources like fuel, sunlight, wind, water, plants, animals, etc., play a huge role in business—to fulfill energy requirements and produce raw materials. This is especially the case with firms that produce goods.
Financial resources are indispensable prerequisites for any business. Without funds, a firm cannot survive. It is utilized for the following purposes:
- Establishment and Purchase of Assets: Funds are required right from the get-go. New businesses invest money to procure real estate, machinery, tools, raw material, employees, business registration, licensing, and publicity (advertising).
- Working Capital Needs: Every firm requires cash for day-to-day business operations—payment for regular expenses like inventory, salary, rent, electricity, commission, interest, freight, etc.
- Production of Goods or Services: A company invests in technology, training, and development of employees to attain productive efficiency.
- Business Expansion and Growth: Manufacturing especially requires substantial investment—right from the start. Whenever a firm attempts business expansion or ramps up production, it needs funds to rent a larger space, replace old machinery with new ones, hire more employees, and adopt better technology.
- Increases Employment Opportunities: When investments increase, businesses grow. Consequentially, the requirement for skilled labor increases. Ultimately, invested funds lead to increased employment within a country.
- Economic Development: Financial resources are fundamental to economic development. It funds increased economic activity, leading to increased productivity and employment generation within a nation.
Frequently Asked Questions (FAQs)
Money is called ‘capital’ only when it is used to generate value—when financial resources are utilized to produce goods. Money can be used for productive and non-productive purposes.
Resources used by a firm can be categorized into subtypes: financial, natural, and human. Financial resources are further sub-divided into
#1 – Equity
#2 – Debt
#3 – Working Capital
#4 – Trading
Arranging finance for a start-up is a crucial step—it lays the foundation of a business. An entrepreneur can start by investing their personal savings into their business. In addition, they can also seek financial help from friends and relatives. Alternatively, a start-up can procure a business loan from a financial institution. Other external fund-raising sources include crowdfunding and angel investment.
This has been a guide to what is capital & its meaning. We discuss capital employed, its definition, investment, and types (human, working, and equity). You may learn more about it from the following articles –