This is a vital source of financing across all types of businesses because companies need these resources in order to operate. Businesses raise capital by issuing stocks and bonds to investors who purchase these financial instruments with cash or other assets. It’s important to distinguish money from capital because they aren’t the same thing. Capital is more durable than money and is used to produce something and build wealth. Property rights give capital it’s value and allow it to generate revenues and build wealth. Equipment, machinery, patents, trademarks, brand names, buildings, and land are a few examples
Ana is the CEO of a large conglomerate that has various business lines in the insurance and energy industries. Her company wants to build a new energy plant that will need to be funded in the next year. A majority of her managers have come to her with multiple proposals for a total of $100,000,000. This is an extremely large expense that has to be funded this year in order to expand operations. In order to fund this, Ana must use a variety of resources including the cash and short-term investments that the company holds as well as sell company stock to new investors.
Types of Capital
- Current Assets – Current Liabilities
- Accounts Receivable + Inventory – Accounts Payable
Capital vs. Money
At its core, capital is money. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future. Capital usually comes with a cost. For debt capital, this is the cost of interest required in repayment. For equity capital, this is the cost of distributions made to shareholders. Overall, capital is deployed to help shape a company's development and growth.
In a nutshell:
- The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth.
- The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions.
- Any debt capital is offset by a debt liability on the balance sheet.
- The capital structure of a company determines what mix of these types of capital it uses to fund its business.
- Economists look at the capital of a family, a business, or an entire economy to evaluate how efficiently it is using its resources.