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WHAT IS CAPITAL IN FINANCE

These are financial assets that are held in terms of deposit accounts or physical factors of production such as plant and machinery. Capital in finance can also mean facilities such as warehouses or buildings for the production of goods. Note that materials that are consumed during the production process cannot be classified as capital.

The Concept of Capital in finance

For a financial asset to be considered as a capital, it should have the power to provide ongoing service in an enterprise or business for wealth creation. Capital is combined with human resource or labor to create value. A human resource or labor is a value created by individuals by exchanging their skills as well as time for money or another form of currency. For a company to have future prosperity, it should invest its capital in the right channels.

Capital as explained earlier, it may comprise of tangible assets which are subjected to depreciation. The depreciation is due to the causes of wear and tear over time. Depreciation costs are recorded in the statement of income as an expense which can be eligible, used during tax deduction in the business.

Types of Capital in Finance

There are five major types of financial capital namely

  • Debt
  • Equity
  • Specialty capital
  • Fixed capital
  • Working capital
  • Debt capital in finance
  • Debt is a major business capital that companies receive to pay it back with interest in the later date. For small businesses, they receive debts from family banks and other microfinance institutions. After fully establishing themselves, they are legible to get some loans to finance their debts from large banks as well as the federal government. One of the primary debts is the bond. Big companies can issue bonds to potential investors. The bondholder receives the agreed money back upon maturity of the bond.

    Equity capital in finance

    The second type of capital is equity. Here, a company exchange cash equivalent to a portion of ownership of the business. The common form of equity is stock. When a business becomes successful, it can issue stocks to gain extra capital through an initial public offering. Stocks issued by large businesses can be purchased by any interested investor.

    Another form of equity capital is venture capital. For a company to gain the benefits of venture capital, it has to sell some of its interest in the company via stake or future earnings to its venture capitalist.

    Specialty Capital in finance

    This is the type of extra capital obtained from better management of the business cash flow. A good example of a specialty capital is the vendor financing whereby a business is willing to be paid due to delayed payments of goods and services. At times, the company managers can also invest in bull markets where they make more money than that of its operations.

    Fixed capital

    This is the type of capital a company uses to purchase fixed assets that will help them make profits. The requirements of fixed capital are determined by the size of the business, nature of the business, location of the business as well as the stage of development.

    Working Capital

    This is the kind of capital that is earned from the net profit of a business. Working capital revenue remains after a business pays its current obligations and debts. This type of capital is significant in meeting the business’s daily expenses. Factors that determine the working capital include debt ratio, profit level, seasonal produce, and rate of stock turnover ratio, time of production and business policies among others.

    Calculating working capital and other capitals can be tiresome and confusing at the classroom level. That way a student requires the guidance of finance homework help online to boost his or her finance grades.

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