What is Capital?

Capital is anything a business uses to generate income. In simple terms, capital is the potential for any item to create wealth.

Types of Capital

In the economic sense, capital comes in many forms: currency, equipment, facilities, land or even people.

Let's say Company XYZ has $1 million of cash, a widget-making machine and a fleet of delivery vehicles. These items generate income: The cash earns interest, the widget-making machine makes widgets that have a 10% profit margin, and the delivery vehicles support the operation. They are all examples of capital.

The four specific types of capital include:

1. Working Capital

Working capital is money available to a company for day-to-day operation and is a financial metric used for measuring its overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts, a company's working capital reflects the results of an assortment of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.

2. Debt Capital

This refers to capital obtained through the assumption of debt. Debt capital can be acquired through banks and financial institutions, public entities, among various other means.

3. Equity Capital

Equity capital includes funds obtained from the sale of stock as well as private investments from business owners. In contrast to debt capital, equity capital does not need to be repaid.

4. Trading Capital

Trading capital, often referred to as 'bankroll,' is money set aside for buying and selling various securities and assets. It is typically reserved for more speculative ventures.

Why Capital Matters

Capital makes the business world go 'round because it reflects and determines what is bought and sold in an economy. In the economics world, centuries of debate have existed over who should control a nation's capital, who is oppressed by those who have more capital than others, and how capital should be distributed.

Simply put, capital is an essential and fundamental component of conducting business.