Business capital refers to the financial resources, such as cash, investments, and assets used to generate sales and fund its operations at a profit.
Primary Implication
If you are struggling to capitalize on new business opportunities, it is likely a function of failing to put your business capital to the best use.
Those who understand the sources and uses of capital are those who always have access to the money they need to fund what they want to do. Failure to achieve an appropriate balance of Operating, Debt, and Equity Capital financing robs you of the flexibility to move on to anything game-changing for your business.
Overview
Business Capital is cash and liquid assets being held or obtained to cover planned expenditures and investments intended to give its owner value or advantage. It is Cash Inflow from Operations, Debt, and Equity Financing. The expanded use of the word capital includes all a company’s assets with monetary value, such as equipment, property, inventory, patents, and other financial assets.
One of the reasons many economic theories are of little value to business owners lies in how they dismiss money as a capital resource because money does not directly produce a good or service. They define money as a medium of exchange of value without any value in and of itself. They don’t consider money a productive resource. What academics fail to recognize is that without money, you can’t buy capital goods or cover expenses required to produce the goods and services your customers acquire from you with their money.
The most efficient source of capital funding is cash flow from operations that reside in your bank and investment accounts and are reported as a current asset that is offset on your balance sheet as retained earnings. The second most efficient source of capital is equity capital representing capital contributions from ownership that belong to the owner that they only make money from by generating returns from the business for every dollar of capital they infuse into a business. The third primary source of capital is debt capital. The upside of debt capital representing borrowed funds that must be repaid later with interest is only realized when the returns generated from the financed debt capital are greater than the debt service costs to repay the financed capital.
The three primary working capital formulas used to calculate capital are:
- Working capital = current assets – current liabilities.
- Net working capital = current assets (minus cash) – current liabilities (minus debt).
- Operating working capital = current assets – non-operating current assets.
Ultimately, capital is the amount of money available to a business for investment that is best represented in the overall equity position of the business. Equity is more than that part of the business that belongs to the owner. Equity itself is a company’s total assets less associated liabilities. It is the cumulative result of every business decision and action taken by ownership, management, and employees. The exponential capability of capital lies in how well capital is deployed to grow profits and build cash reserves by providing the assets a business needs to generate more revenue at a profit.
Another important fact about business capital is that the sources tapped to raise capital determine the capital structure for the business. The blend of equity and debt financing significantly impacts the value of any business because the mix of equity and debt represents different risk profiles that must be covered by cash flow. This blend of capital sourcing is how a potential investor determines the amount they are willing to pay for the company or for an interest in it.
