In the business world, the term ‘capital’ is an integral part of driving business and building an economy. Companies have capital structures that include equity capital, debt capital and working capital for day-to-day operations. People hold capital as well as the capital assets as the net worth. The manner and quantum in which the individuals and companies finance their working capital is of paramount importance as the investment in capital is essential for development and return on investment.
What is capital?
Capital refers to financial assets, such as funds in the form of deposit accounts and funds got from special financing sources. Capital can also be relatable with the capital assets of a company that requires a significant capital contribution to finance or develop.
Capital can remain as financial assets or be raised from debt or equity financing. Businesses mostly have three options for business capital: working capital, equity capital, and debt capital. In general, business capital is the essence of running a business and funding capital intensive assets.
Capital assets are those assets of a business which include the current or long-term portion of the balance sheet. Capital assets include cash, cash equivalents, and marketable securities as well as plant and equipment, production facilities, and storage facilities.
Why is capital important?
Capital functions a vital role in the modern productive system as follows:
Production without capital is not possible. Elaborate tools and sophisticated equipment are required for modern-day production.
It increases the productivity of employees and in turn, the economy as a whole. Importance to technology and specialisation alongside a growing population has left manufacturers to arrange for more capital and allied resources to fulfil the demands.
Capital accumulation is said to be the core of economic development. The economy may be a free enterprise economy found in America or a socialist seen in Soviet Russia or a mixed economy like that of India. Irrespective of these types, economic development needs critical ingredient, such as capital formation.
Capital helps in creating employment opportunities. Workers are employed to produce capital goods as well as consumer goods.