Financial Capital markets provide fast and efficient access to funding, allowing companies to expand their operations and grow. They include Global Stock Exchanges and investment banking firms like Goldman Sachs, Morgan Stanley, Credit Suisse and several others that have existed for many years.
Capital is not the same as money. An important difference is that money has a more immediate purpose and is used to buy and sell goods or services within a company or between two companies or individuals. Capital involves those aspects of a company that help to build and improve it.
A banknote in itself is not capital. However, if it is invested into a business, such as buying stocks and shares, then it becomes capital. Financial Capital is more durable than money and is used by businesses to function and to create revenue.
Capital isn’t used to act in the present. It is always a forward-looking financial instrument to generate a company’s financial wealth and profit potential into the future.
Financial capital has several definitions, the most common of which is any financial resources or assets that businesses use to further develop their operations and generate income. These can include cash, equipment, machinery, patents, trademarks, brand names, buildings, land and other resources. They may also include more long-term assets including investments and stocks that could benefit the company in the future. Capital is used to create products and services to sell to customers and generate revenue.
Capital exists in several different forms:
- Internal economic capital: This includes financial assets available including funds available and equity financing. It can also include non-financial capital such as company reputation and the value of your brand.
- External economic capital: This covers the impact an organization can have on the financial and non-financial capital of other entities. A new factory, for example, may increase or decrease the real estate values in the surrounding area.
- Debt capital: This form of capital may be a surprise to many people. Borrowing money to generate profits far greater than the cost of the loan is good debt; it is creating money for the company and is therefore an asset. Money borrowed that is not generating adequate funds to cover the loan, is costing the company and is therefore a liability and bad debt.
- Natural capital: This covers the entire natural resources that we rely on, including ecosystem services such as waste water treatment and disposal.
- Human capital: This covers knowledge, skills, patents, experience, health, attitudes, customer service, organisation and motivation of individuals.
- Social and relationship capital: This includes teams, networks and groups of individuals working together, and includes their shared intellectual capital.
- Constructed capital: This covers material objects such as buildings, systems, manufactured products, and ecosystems created or cultivated by people.
- Specialty capital: This less well-known form of funding is a widely used method of creating capital. For example, a supplier who has been persuaded into delaying invoicing to a later date, is giving his customer extra time for generating revenue, and the company is thus using the invoice extension as a form of business capital.
Tax on Capital
Since capital is owned by a company, such assets are protected from tax. However, capital ownership can be transferred or sold, and consequently in some circumstances, may be taxed.
Capital that has gained in value (capital gain) over the period of a company’s ownership from the time of purchase to when it is sold could be liable to taxation.
Conclusion
Capital is the life blood of every economy. It is the means by which companies invest and grow, providing jobs, and the products and services that they sell. Such investments also provide us with the opportunities to invest in the growth of their businesses and to generate passive incomes for ourselves, pension funds and our eventual retirement.
