18/06/2021

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What you need to know about capital in business finance

Some people confuse business and finance, and while both words are closely related, they are...

Some people confuse business and finance, and while both words are closely related, they are as distinct as they come. The relationship between both words is money, otherwise known as capital. Business Finance, in lay man’s terms, including the monies and credit used by a business to run its operations. Finance is the lifeblood of business, needed for the purchase of raw materials, assets, payment of bills and wages, etc.

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Capital in Business Finance

Capital is anything that increases one’s ability to generate value. It can be used to increase value across a wide range of categories, such as financial, social, physical, intellectual, etc. In business and economics, the two most common types of capital are financial and human. On the other hand, a business is a venture, an activity that involves the use of capital and/or financing options and principles. This guide will explore all the above categories in more detail.

Types of Capital in Business

Many scholars have come up with different types of capital, and visiting ReviewsBird.com can offer more insight about the different types. This article, however, highlights the basic types of business capital, which can be used to increases an entity’s ability to generate value:

Human capital

If capital is seen as anything that increases one’s ability to generate value, then human capital, simply put, is the engagement of humans to generate or increase the value of a business or generate income. But how is it done? It is worth knowing that companies don’t own people the way they do other assets.

What we mean by human capital here also includes the intellectual and skills/talents of humans used by businesses and companies. The intellectual aspect here refers to the intelligence of people, which can be used to successfully run a company, think creatively, solve problems, form strategies, and outperform competitors. Skills and talents are used in much the same ways as intelligence to help a business operate and generate revenues.

Financial capital

Debt and equity are the common forms through which we talk of financial capital. While debt is a loan or financial obligation that must be repaid in the future, Equity is an ownership stake in a company and in the event that it is sold out, the equity investors will receive the residual value of the company.

Natural capital

Natural capital can also be used by businesses to generate income and increase production. Many businesses use natural resources such as water, wind, solar, animals, trees, plants, and crops to operate their company and increase value over time. Companies may or may not own the natural assets they require to operate.

All the types of capital identified below can be utilized and converted into profit in business, and when properly managed, can improve the bottom line of any business. Business finance procedures specialize in the maximization of profit and minimization of financial risks by harnessing the above-listed types of capital, through activities such as budgeting, analysis, portfolio management, accounting, financial management and even taxing – in short, every issue that involves the monetary aspects of any economic entity.