The importance of capital

In general, capital is a term used to define the resources used to make money. Basically, you can use the capital to do something else. If you are interested in economics, there is much to learn about the concept of capital as inputs in the production process.

But we are talking about accounting and finance for small businesses, so we favor the interpretation of the fixed assets accounting. In practical accounting terms, you can think of fixed capital in fixed assets. The fixed capital assets are used to make something that is then sold for revenue. This is the way to convert equity into cash.

If you want to see your capital, pull out your budget and look on the asset side. You see cars, buildings, trucks or trailers? If the budget does not include that level of detail you may need to ask the accountant for a task list. For those of you who already have their hands, they may well have created the list alone.

In addition to capital assets, you should have some working capital. The working capital is what is used in everyday operations - think of it as your capital inserted by hand. Remember from our previous discussions that resources, such as inventory and raw materials are commodities?

If you take the current resources, like cash, commodities and stocks, then subtract current liabilities such as accounts payable, you will get your capital. We hope that the amount of capital you have is enough to get you through a couple of weeks of hard times. The working capital is what you need to manage every day, because if you do not, you could run out and fall.

The depletion of working capital is bad because it means you are out of balance. Your assets, including cash, will begin to pale against your liabilities. It is not easy, however, to manage working capital. It takes hard work and understanding. We'll talk more on working capital in lesson two.

Many small businesses begin getting capital when starting out. It expects to make money and you have a capital to be used to make money. Some small businesses can take off from the start and did not need another infusion of capital.

If your company is growing at a pace that allows you to reinvest profits and continue to grow so it might not be necessary to seek more capital. But some business plans require regular infusions of capital, especially in the beginning stages of growth, to stay on target.

It 'good to need more capital until your growth and profits in future projects can support the repayment of principal plus. Some capital is guaranteed by a guarantee and is not really at risk until you can make a payment and the equipment is taken away. This could have disastrous effects on related parties of the production system....