Financial capital definition: Everything you need to know

Businesses need resources to produce goods or services. Financial capital includes the resources that a business can use to generate revenue. Almost anything can be considered financial capital if it’s used for revenue-producing purposes and has monetary value.

To keep a business running, business leaders leverage different types of financial capital to fund their high-level strategies and drive success.¹

This article will discuss finance capital, including different types and sources, as well as its importance and role in business strategy.

Businesses use different types of capital for different purposes. To define financial capital, you need to consider what it’s used for.

Businesses use financial capital to invest in the business and create more revenue, often by purchasing new equipment or buildings. From research and development to investing in new technologies, business leaders have to spend money before they can realize profits from their core business activities. Financial capital provides the funding for these investments.²

Two factors that distinguish capital from money are risk and revenue. Finance capital meaning includes a base level of risk because–by its nature–it’s being used to create revenue. There are different types of financial capital, including equity, debt, working, and fixed, that business leaders can access and use, each with its own function and risk profile.³

Businesses raise equity capital by selling off a portion of ownership in the business. Equity financing helps businesses raise funds without taking on debt. Publicly traded companies raise equity capital by selling shares of stock. Private companies can also raise equity capital, but they often do it by offering membership in a limited liability corporation (LLC).⁴

Instead of—or in addition to—selling part of the business to raise capital, you can take on debt. Publicly traded companies can do this by selling bills, notes, or bonds. These are debts that have to be repaid in the future. Companies can also take on other, more traditional, forms of debt as financial capital, such as term loans, lines of credit, and equipment financing.⁵

The money you have available to cover upcoming expenses is your working capital. Working capital is calculated as a ratio by dividing current assets by current liabilities. You can also calculate net working capital by subtracting current liabilities from current assets. Experts only consider short-term assets and liabilities when calculating working capital. This ratio or number gives a quick insight into a company’s financial health.⁶

Before a business can begin making an end product or providing a service, it has to have a minimum amount of assets, such as a manufacturing plant or equipment. These assets are fixed capital, and they don’t get used up when creating the product or service a business offers. They’re depreciated over time, up to 20 years or longer. In contrast, circulating capital, a type of variable capital, includes items such as raw materials that are used up in creating finished products.⁷

Human capital refers to the knowledge, skills, and experience that employees bring to a company. It plays a crucial role in business operations and directly impacts future profits. Like financial capital, investing in human capital through training and development helps businesses grow and remain competitive.

For corporate leaders, maintaining a strong workforce is as important as managing tangible assets or borrowing money. By enhancing human capital, businesses improve their company's ability to generate revenues and stay competitive in a rapidly changing market.

In addition to debt and equity capital, businesses with excess working capital can use retained earnings as a source of financial capital. To obtain debt capital, business firms can sell debt instruments directly or turn to sources like commercial banks, government lending programs, or supplier financing.⁸

Equity capital sources can be tapped through private investors, such as angel investors, venture capital firms, or publicly selling stocks. Many companies find private investors in their early stages and later offer shareholder equity through the stock exchange.⁸

While retained earnings don’t come with any of the drawbacks of debt or equity finance capital, it’s often not large enough to make major investments.⁸

Liquidity refers to how easily a company can convert its assets into cash to meet short-term obligations. Financial assets, such as cash, accounts receivable, and liquid assets, are crucial for maintaining a company's cash flow and supporting its operational needs.

The Federal Reserve Bank plays a significant role in influencing liquidity through monetary policy and federal loan programs, impacting how companies manage their capital structures.⁹ A strong liquidity position ensures that a company can raise capital when needed, whether through selling financial assets or utilizing its working capital effectively.

Understanding the balance between liquid and non-liquid assets, including fixed capital and natural resources, is essential for maintaining the company's monetary resources. Businesses must regularly assess their current assets and liabilities to ensure they have sufficient liquidity to navigate market fluctuations and capitalize on growth opportunities. This strategic approach to liquidity helps protect a company's residual value and supports its long-term financial health.

Without adequate financial capital, businesses can’t invest in growth opportunities that can lead to long-term success. There are many reasons businesses need financial capital. If a business is reaching its maximum capacity at a current location, it may need to buy new production facilities to keep up with customer demand.¹⁰

Businesses often need financial capital to fund strategies such as developing new products or reaching new audiences through marketing and advertising campaigns. In today’s competitive marketplace, businesses that aren’t focused on growing won’t succeed. Financial capital is foundational to supporting business growth.¹⁰

Business leaders develop strategic plans to fulfill their vision and achieve their goals through an action plan. Once they have clearly outlined objectives, they evaluate where they currently stand through a SWOT analysis. SWOT stands for strengths, weaknesses, opportunities, and threats. By identifying these factors, they can determine what steps they need to take to achieve their objectives.¹¹

Regardless of the ultimate strategy or objectives, almost all businesses will need financial capital to carry out strategic plans. Whether it’s growing in an existing market or offering new services, financial capital gives businesses the resources they need to generate revenue.¹¹

Business leaders strategically manage financial capital to further their company's vision and objectives. Capital budgeting allows them to evaluate whether they should invest financial capital in specific projects designed to increase revenue. Through planning and analysis, leaders can determine if long-term investments in equipment, buildings, research and development, or other projects will pay off.¹²

Businesses and investors consider capital structure when evaluating potential capital projects. Capital structure is the combination of debt and equity a company uses to fund its growth. The right capital structure will depend on factors such as the industry, whether a business is labor-intensive or service-oriented, and historical earnings.¹³

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