Table of Contents
What is a Capital?
Capital is the monetary worth of anything that can be turned into money. But you shouldn't mix money and capital up. Money is often spent on things that are needed right now. Capital is the money that is used to run a business so that more money and a steady cash flow can be made. So, capital is an object that can make money for the person or organisation that puts it to use in the first place.
A "dead" property is one that doesn't bring in any money or give you a return. Because of this, the money is called "dead capital." Most dead capital in India comes from buying gold or a piece of land in a faraway, unknown area that the owner will probably never visit. Capital has no value on its own. It has to be put together with the work and skills of people who trade their skills for money. When cash, skill, and work are put together in this way, wealth is made.
When this happens, money is made, which helps an economy grow. The most important question in modern economics is what role workers and capital play. People usually want to know which one is more important. Capital is very important because it gives a person or a company the right to own a business or to run it as their own.
Capital markets are places where people can easily trade capital. These allow a person with extra capital to find the most skilled workers in an economic system where the extra capital can be put to good use and earn the person more money.
What does "working capital" mean?
The owner of cash must make two kinds of investments for a business to work.
Fixed assets are investments in things that can't be moved, like land, buildings, and machines.
Working capital is the money that needs to be invested to pay for finished goods, raw materials, customer debts, normal bills like rent and utilities, and salaries.
Take the case of a person who runs a business selling popcorn.
1. Fixed assets: The money that was spent to buy the popcorn machine and push cart.
2. Working capital is the amount of money you need to buy corn, butter and wrappers.
The working capital of a big company is its net present assets. The number is the difference between current assets and current bills. This is the total amount of raw materials, semi-finished goods, finished goods, and customer receivables minus the amount still owed to sellers. In a healthy business, the difference between current assets and current bills should be more than short-term bank loans.
Working capital as a portion of revenues (turnover) can be used to figure out how well a business is doing. This shows a client how well the business is using its money. If the company increases the number of times its working capital is turned over in a year, it will be able to make more money without having to borrow more money.
How are different kinds of money raised?
A business can use its capital in three different ways.
1. Debt: If you give money to a business, you can expect to get your money back plus interest at the end of the agreed-upon time. The length of the loan is something that both sides agree on. Large companies can get money straight from the capital markets in the form of debt. They do this by giving out shares and loans. The investor usually makes sure his money is safe by putting up assets as collateral.
If a company goes out of business or gets sick, its creditors have the first right to its assets. But the lender has no right to the money that the company makes. Small businesses that can't borrow money on the capital markets can get it from banks and other financial institutions.
2. If a person or a financial institution stands guarantee for a business transaction between a company and a new or current customer or supplier, the person or institution will get paid for the transaction. Most of the time, the fees for this kind of promise are around 1%. A letter of credit is the most common way for a company to back up a promise. In case of default, the organisation agrees to pay the supplier of goods or services.
3. The third and most important group is made up of people who have money and use it as a partner in a business. This usually happens in a company that is open to the public and whose shares can be bought on any of the major stock markets. The person who owns the share becomes a partner in the business. He or she has all the rights of a shareholder based on how many shares of the company they own.A majority of shares on the market can be used to take over a public limited company that is already in place. But it should be clear that the owner of stock has the last say over the company's assets if the company goes out of business. The only good thing is that he is only responsible for the amount of money he put into buying shares of the company.
