CAPITAL IN ENTREPRENEURSHIP

Definition;

In the more precise usage of accounting, capital is defined as the stock of property owned by an individual or corporation at a given time, as distinguished from the income derived from that property during a given period

Capital is collective term for a body of goods and monies from which future income can be derived.

Thus, a business regards its land, buildings, equipment, inventory, and raw materials, as well as stocks, bonds, and bank balances available, as capital.

Generally, consumer goods and monies spent for present needs and personal enjoyment are not included in the definition or economic theory of capita

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Thus, Homes, furnishings, cars, and other goods that are consumed for personal enjoyment (or the money set aside for purchasing such goods) are not considered capital in the traditional sense.

A business firm accordingly has a capital account (frequently called a balance sheet), which reports the assets of the firm at a specified time, and an income account, which reckons the flow of goods and of claims against goods during a specified period.

Circulating capital. Circulating capital refers to nonrenewable goods, such as raw materials and fuel, and the funds required to pay wages and other claims against the enterprise.

Fixed capital includes all the more or less durable means of production, such as land, buildings, and machinery

Liquid capital

Frequently, a business will categorize all of its assets that can be converted readily into cash, such as finished goods or stocks and bonds, as liquid capital. By contrast, all assets that cannot be easily converted to cash, such as buildings and equipment, are considered frozen capital.

productive capital and financial capital

Another important distinction is between productive capital and financial capital. Machines, raw materials, and other physical goods constitute productive capital. Claims against these goods, such as corporate securities and accounts receivable, are financial capital. Liquidation of productive capital reduces productive capacity, but liquidation of financial capital merely changes the distribution of income.

                                         

                                  categories of financial capital

There are three categories of financial capital that are important for you to know when analyzing your business or a potential investment. They each have their own benefits and characteristics.

                                        

                                                 Equity Capital

Otherwise known as “net worth” or “book value”, this figure represents assets minus liabilities. There are some businesses that are funded entirely with equity capital (cash written by the shareholders or owners into the company that have no offsetting liabilities.)

 Although it is the favored form for most people because you cannot go bankrupt, it can be extraordinarily expensive and require massive amounts of work to grow your enterprise. Microsoft is an example of such an operation because it generates high enough returns to justify a pure equity capital structure.

                              Debt Capital

This type of capital is infused into a business with the understanding that it must be paid back at a predetermined future date. In the meantime, the owner of the capital (typically a bank, bondholders, or a wealthy individual), agree to accept interest in exchange for you using their money.

Think of interest expense as the cost of “renting” the capital to expand your business; it is often known as the cost of capital. For many young businesses, debt can be the easiest way to expand because it is relatively easy to access.

 The profits for the owners is the difference between the return on capital and the cost of capital; for example, if you borrow $10,000 and pay 10% interest yet earn 15% after taxes, the profit of 5%, or $5,00, would not have existed without the debt capital infused into the business.