By simple definition, capital is wealth in the form of money or assets which signifies the financial strength of an individual, organisation or nation. In this article, we will be focusing on capital from the business aspect.
Money and capital may be perceived as the same thing, however they are not. Capital is a much broader term which encompasses many things in a business that can be used to generate revenue and income. Money, on the other hand, is just what is used to complete the purchase or sale of assets that the company makes use of to increase its value.
Besides money, companies rely on different kinds of capital such as human labour, on land, water, and energy, on machinery, and on the community. At the basic level, a business should know about three main types of capital which are financial, human, and natural.
Debt and equity are the most common forms of financial capital.
Debt is a loan or an amount of money borrowed by one party from another that must be repaid in the future. There may be an interest expense attached to it, which is the cost of borrowing money. The cash loan is then used to purchase an asset and fund the operations of a business. This is how a company generates revenues.
An ownership stake in a company is called equity. In the event where equity is sold or wound-down, equity investors will receive the residual value of the company. It does not have to be repaid nor does it have an interest expense associated with it like debt does. Equity is used to fund the business and purchase assets to generate revenue.
Another way to generate revenue for a company is with the assistance of human capital. Human capital is utilised by businesses to create products and perform services which is how revenues are acquired. Unlike other assets, companies do not “own” the people which they regard as their capital.
The intellectual and skills/talents of people or employees are what is identified as capital. The intelligence, skills, and talents of people are used to successfully run a company. When people think creatively, solve problems, exercise manual labour, form strategies, and outperform competitors is how human capital benefits a business.
Many businesses use natural resources (which they may or may not own) such as water, wind, solar, animals, trees, and plants to operate their company and increase value over time. This is what is meant by natural capital and indeed, businesses utilise this capital to generate income and increase production.
In business, a company’s capital base is absolutely essential to its operation. Inadequate funding in a company may result in the inability to afford the assets it needs to operate and survive which ultimately will give the company a hard time to outperform its competitors.
Capital is the tool that offers companies and investors the ability to boost productivity, provides valuable goods and services and helps create wealth for both parties in the process. If you are a business owner, make sure to equip yourself with adequate knowledge on capital. Being wise with the acquisition and management of all your capitals will help your business to further grow and develop.