Finance: Understanding Capital

Capital is a term that can be associated with multiple different words, from capital letters to state capitals, it seems that people have been introduced to most of these basic ideas throughout their school years. However, a concept that is not necessarily taught in school that people need to be educated about is financial capital, especially in the business industry.

Financial Capital refers to the resources a company needs, to provide goods and services. It is responsible for financial assets (such as funds held in deposit accounts) and can serve as an explanation for the tangible factors of production, like manufacturing equipment, in a start-up business. A well-known company that uses Financial Capital to expand is Apple. Their 2018 Annual Report indicates that “ The Company anticipates utilizing approximately $14.0 billion for capital expenditures during 2019, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.” This real-world example shows how the company spent money to expand their inventory in order to create more products and services that people could use. Thus, this can tie into the overall theme of Financial Capital since it expands on the definition and what processes are needed in order for the business to successfully run.

If this idea does not make sense it is often because the concepts of capital and money have been interchanged. Because of this confusion, people have trouble grasping the concept of financial capital. In order to overcome this barrier, try to keep this in mind- Capital is money used to buy items in order to sell, while money is used to buy items for everyday purposes. To explain further, Investopedia states, “Capital involves the aspects of a company that help shape and expand it, including any of the assets that can benefit the company in the long term, whereas money refers to the instrument used to purchase goods and services, serving a more immediate purpose.”Additionally, money is used to purchase the materials that have been made using capital. With this, it can be inferred that capital is more durable and used to generate wealth through long-term investment.

This is just one part of understanding financial capital, so on the other hand, it’s time to embrace learning about different types of capital. The most common type of capital is debt capital, where business’ have the ability to acquire capital from private and public sources as well as insurance companies due to the assumption that the business has debt to pay off. Next up is trading capital, which is in regards to the money a company allows to buy and sell a wide variety of products. Trading capital is heard more often as bankroll. It is also important to remember that this capital can be increased due to trade optimization methods. Third in line, happens to be working capital which analyzes a businesses current assets and current liability on a short-term scale. Lastly, there is equity capital, the exact same thing as debt capital except for the fact that the lender of money does not have to be repaid. In the world of finance, these types of Capitals are not always encountered, but it is still very important to know them just in case something were to happen.

Ultimately, understanding the importance of capital and how it works can give people a leg up especially in the finance and business industry, but in general as well. So, the next time someone mentions the word capital, tell them about finance capital. After all, it will look really good!

By Seetha Murugappan