banner image What is Capital in Business Meaning Types and How Its Used

What is Capital in Business - Meaning, Types, and How it's Used

August 19, 2023 • 1184 views

Whether you have a start-up or a large corporation, capital is crucial for your growth and success. It serves as a measure of a company's finances and represents its ability to operate, expand, and adapt to market changes. But what is capital in business? Capital in business refers to the financial resources used to generate revenue or profit. Businesses use capital to fund their operations, investments, and expansion.
Capital is the backbone of business. Businesses use capital to fund their operations, investments, and expansion. It can be of different types, including cash, machinery, inventory, property, or even intellectual property. It serves as a measure of a company's finances and represents its ability to operate, expand, and adapt to market changes. Let’s see the features and importance of capital in business.

Business Capital Structure

Business capital structure is the amount of debt and equity leveraged by a firm to finance its assets and fund its operations. Balance sheets help in analysing the capital structure of a venture. Debt is short-term or long-term money borrowed in the form of liability. Equity is the stake ownership in the company.

Features of Business Capital

Capital plays an essential role in any business. Thus, it is important for you to know the different features of capital, they are as follows:

  • Any kind of asset, wealth or money that is used to fulfil operational or production activity is called capital.
  • Proper utilisation of capital is vital for growing or expanding your business.
  • Capital is different from money.

ALSO READ :- How to Manage Cash Flow in Business?

Difference Between Capital and Money

Capital and money are usually used interchangeably. But they are not the same. Capital has costs associated with it, and money does not have any associated financial costs. Money is a broader term, and capital is part of the money used for revenue generation for business.

Importance of Capital for a Business

Now let’s understand why capital is extremely important for any business in the following points:

  1. Production: Capital is required to fulfil the short-term and long-term monetary requirements of a company. You need capital to produce goods, buy machinery, upgrade infrastructure, etc.
  2. Employment Opportunities: Human resources are essential to successfully run a business, thus, to pay their salaries, businesses require capital. Thus, capital creates new job opportunities.
  3. Enhances Business Operation: Technology has been improving rapidly over the past years. Thus, it is important for businesses to use capital to access the latest technology and produce the best quality products. 

Different Types of Capital in Business

In business, capital can be classified into various forms. They are as follows:

  1. Debt Capital: This includes loans, bonds, or other forms of borrowed money that a business must repay with interest.
  2. Equity Capital: Equity Capital refers to funds provided by shareholders or investors who become partial owners of the company.
  3. Working Capital: It represents the funds used for day-to-day operations, including inventory, accounts receivable, and cash flow management.
  4. Fixed Capital: It encompasses long-term assets such as property, plant, and equipment used in the production process.
  5. Human Capital: This refers to the knowledge, skills, and expertise of the employees and their contribution to the business.

How to Utilise Capital?

Utilisation of capital includes the strategic allocation of resources to generate maximum returns. Some of the best ways to use capital include:

  1. Investment in Growth: Use capital to expand operations, enter new markets, launch new products, or invest in research and development.
  2. Asset Acquisition: Allocate capital to purchase essential assets such as machinery, technology, or real estate to improve productivity and competitiveness.
  3. Working Capital Management: Optimize cash flow, inventory management, and receivables to ensure efficient operations and liquidity.
  4. Debt Repayment: Allocate funds to repay debts on time, reducing interest expenses and improving the company's financial health.
  5. Talent Development: Invest in training and development programs to enhance the skills and productivity of employees.

ALSO READ :- What is the Working Capital Turnover Ratio?

Return on Invested Capital or ROI

ROI or Return on Invested Capital represents how appropriately a business has utilised its capital to generate profit. You can use the formula given below to calculate ROI: 
ROI = (Net Profit – Dividend) / (Equity + Debt)

Return on Equity or ROE

ROE explains how a company utilised the funds received through equity for growing their business. This helps in determining how a company creates shareholder value. You can refer to the below formula for calculating Return on Equity:
Net Profit / Shareholder’s Equity = ROE

Return on Assets or ROA

ROA is used to determine and evaluate a business’s asset usage for revenue generation. The formula given below can be used to determine ROA:
 ROA = Average Total Asset / Net Profit 

How to Grow Capital?

Few ways in which you can grow your capitals are mentioned below: 

  • Fund it Yourself: If your business does not operate in a sector that needs high capital, then investing your own money is the best option. This will help you attract more investors to partner with you in the future.
  • Crowdfunding: It involves investing a small amount of capital from a large number of individuals. This will help you reach people with similar mindsets, even though they are not able to engage in your business. It will also help you understand if people are interested in buying your product or not. 
  • Business Loan: You can apply for a business loan by showing your business plan, annual revenue and more. 

Managing Capital in Different Business Stages

Effective capital management is vital throughout different business stages:

  1. Initial stage: In the initial stage, capital needs may focus on primary investments, product development, and marketing. 
  2. Growing stage: As the business grows, capital is used for scaling operations, hiring additional staff, and expanding business operations. 
  3. Maturity Stage: During the maturity stage, managing capital becomes essential to maintain profitability, innovation, and adaptability to different market trends. It includes regular analysis, budgeting, and forecasting to ensure optimal resource utilisation and sustainable growth.

Capital Gains and Capital Losses

Capital gain is the profit generated by selling assets like buildings, shares, etc, which is more than the purchase price. Capital gains are of two types: short and long-term. When assets held for below 1 year are sold, it is known as a short-term capital gain. Whereas assets sold after being utilised for more than a year are known as long-term capital gain.
Capital losses refer to any loss incurred by selling fixed financial assets like equity, machines, etc., at a price lower than your purchase price. 

To Conclude

Now that you know what capital in business is, you must have inferred that it is the lifeline of any business. Any necessary financial resources to complete its operation, expansion, stability and success are referred to as capital. Poonawalla Fincorp understands the importance of capital and offers an affordable Business Loan of up to ?50 Lakh. Apply right now and achieve your dream of building a big empire. 

Frequently Asked Questions About Business Capital

1.    What is capital in business? 
Capital can refer to the financial resources or assets that an organization uses to operate and make investments. It can be in different forms such as cash, machinery, land, or intellectual property. 
2.    What are the main sources of capital?
The two main sources of capital are debt and equity.
3.    What is the difference between finance and capital?
Finance and capital are related concepts but have distinct meanings in the business context. The meaning of finance is to manage money and other financial resources within an organization. Whereas capital is the overall amount of funds available to be invested in the business.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

We are a team of expert writers and editors passionate about providing our readers with authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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