Capital is an asset that is used by a company for production activities. Capital may include assets that the company uses to generate income, such as real estate, computers, manufacturing equipment, and vehicles.
What is Capital?
Capital is a resource of vitality for wealth creation. In conjunction with land, workforce and entrepreneurship, capital can be used to generate profits for a company’s investors.
Crucially, capital is separated from money, which can be used to purchase capital directly, but is not a productive resource itself. Capital may also refer to “working capital”, which is calculated as the difference between a company’s current assets and its current liabilities.
Capital VS Money: what is the difference?
People often confuse money and capital. The key difference between the two is that capital refers to the production resources of a company, that is, the materials used to create products and services. Money is used to buy fixed assets (such as factories, equipment and vehicles). The value of these assets can be measured in dollars, but money itself is not capital. In fact, money is a simple way to exchange one good for another.
Capital in the economy
Capital can encourage economic growth and job creation. There is a lot of free capital during the economic boom, so it may be easier for enterprises to raise capital by selling shares or borrowing. Sometimes the amount of capital available for investment may exceed profitable opportunities. This can lead to businesses with poor prospects acquiring capital that they wouldn’t have qualified for in tougher times.
However, capital often becomes scarce during the economic downturn. Investors become more conservative and prefer investments with less risk. In such conditions, even strong companies may find it difficult to find capital to grow or maintain operations.
What is equity capital?
Businesses need capital to operate and grow. One option for increasing equity capital is to sell stock. Equity doesn’t have a maturity date, so shareholders don’t expect to buy back their shares for cash by some fixed date.
Private companies raise equity capital through private placements that are open only to accredited investors (individuals with high equity or income, banks, insurers and other sophisticated investors). Companies that go public raise equity capital by selling shares to the general public and to investment banks. Companies use the equity capital they attract, along with other types of capital, to operate and make profits.
What is debt capital?
Businesses can also borrow capital through loans from individuals, financial institutions and other lenders or by selling bonds to investors. Unlike equity capital, debt must be repaid to the investor within a certain period of time.
Debt capital comes from many sources. In terms of credit, it can include banks, credit unions and other lending institutions. Public companies can also sell bonds to institutional investors, such as banks and investment funds.
What is working capital?
Working capital is the day-to-day operating capital of a business. It is the most commonly used measure of a company’s ability to meet short-term obligations. If a company lacks enough working capital, the futher continuation of the business may be in question.
Working Capital = Current Assets – Current Liabilities
Current assets include cash, short-term fixed-income securities, inventories and accounts receivable. Inventories consist of goods that the business sells or, in the case of a restaurant or manufacturing business, raw materials used to make the final product.
Current liabilities include accounts payable, accrued expenses and short-term debt. Accounts payable are expenses that the company currently owes to its suppliers.