Human Capital vs Financial Capital

Updated on:  

08 min read

What is financial capital?

You have the financial capital as a form of economic capital that is crucial to get your business going. It sources capital from equity and debt. You may find companies raising equity capital either through common or preferred stock. 

Moreover, companies raise capital through borrowed funds. It is debt capital repaid at a future date with interest. You have the common forms of debt capital as bank loans and overdraft agreements. 

You also have financial capital in the form of cash, commodities, real estate and vehicles that could be disposed of for cash in the market. 

What is human capital?

You have human capital as the ability and skill of employees to contribute to a business’s success. You may find it difficult to quantify human capital in rupees.

Many companies focus on enhancing the skills of employees through skill development programs and other education classes. You also have businesses keeping their human capital happy through employee benefits for an efficient workforce. 

Financial Capital vs Human Capital

You have many investors focusing on the financial capital of businesses. It helps if you study the Company’s capital structure to get an idea of how it manages its money. 

You have capital structure as the combination of debt and equity used by a business to finance its operations. It is equity and preference share capital, long-term loans, debentures, retained earnings, and other businesses’ capital to run their operations. 

A company uses capital structure to increase the market price of its shares and other securities. It helps businesses optimise the use of funds and increase profits. For example, equity investors benefit from an increase in earnings per share (EPS). You will find a sound capital structure protecting a business from financial risk through the right selection of debt and equity in the capital structure. 

You have many investors focusing on human capital in recent years. It helps as companies demonstrate the value of their human capital in the growth of the business. Investors look at the top management’s leadership style, a company culture that shows a company’s ability to retain talent, learning and development programs to make the workforce future-ready and corporate governance. 

You have human capital showing the ability of a company to create financial capital in the future. It is a measure of the future income-generating potential of the Company. 

You have interdependence between the Company’s economic and human capital for the Company’s future growth in simple terms. The Company must convert human capital into financial capital to maximise return over some time. 

You will find companies focusing on human capital to increase productivity and, thereby, the Company’s financial capital. It helps if companies reward employees with a comprehensive pay structure based on results. You have companies investing in employees as human assets, and it’s crucial for the development of the business. In a nutshell, companies must have a strategy to increase employee productivity and retention to reduce expenses and maximise profits. 

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