After reading this article you will learn about:- 1. Meaning and Concept of Capital 2. Types of Capital 3. Features.
Meaning and Concept of Capital:
Capital is the life-blood of a business enterprise. It is a universal lubricant which keeps enterprise dynamic. Capital designates physical sources when applied to production and (it means) money when applied to finance.
Its meaning, covers all the elements (e.g., money, land, building, machinery, materials, etc.) a businessman needs to start an enterprise. Capital is the measure of the amount of resources of an enterprise. Capital develops products, keeps workers and machines at work, encourages management to make progress and create value.
Capital is an important factor of production. Capital is that part of wealth which helps in production of further wealth, e.g., seeds, machinery etc. An electric fan in the house is a wealth but a fan in an office or factory is a capital.
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Capital may be classified as:
(i) Physical capital, like immovable property, seeds, fertilizers, business capital like goodwill of the firm etc.
(ii) Financial capital like bonds, shares, etc.
Types of Capital:
Capital may be of the following two types:
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(1) Fixed or block capital — it is required to purchase building, machinery, tools etc.
(2) Working or current capital — it is required to meet day-to-day needs and expenditures such as purchase of raw material, payment of employee wages etc.
Fixed Capital is associated with long term assets whereas Working Capital pertains to current operations.
For running an industry, two types of capital are needed. One for purchasing fixed assets such as land, building, machinery, etc. and is known as fixed capital, whereas the other which is required for day-to-day needs is labeled as working capital.
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1. Fixed Capital:
When an industrial enterprise is started from the ground up it requires capital to make/purchase:
i. Land,
ii. Building,
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iii. Equipment and Machinery,
iv. Tools, and
v. Furniture, etc.
Assets of this type are used over and over again for a number of years and are commonly termed Fixed Capital.
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2. Working Capital:
Once fixed assets, e.g., building, equipment, machinery, etc., have been purchased, the enterprise needs funds to meet its day-to-day needs and expenditures such as:
i. Purchase of raw material and supplies.
ii. Payment of employee wages.
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iii. Storage costs.
iv. Advertisement and selling expenses.
v. Equipment and plant maintenance costs.
vi. Transportation and shipping expenses.
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vii. Expenditures during the time lag between the sale of the products and payment for them.
Funds required to cover these costs are commonly called working capital.
Features of Capital:
1. Capital is produced by man by saving wealth.
2. Capital is a factor of production.
3. Capital is transferable from one person/place to another.
4. Constant use of capital leads to its depreciation.
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5. Capital is mobile as it can be moved from one occupation to another.
6. Supply of capital as a factor of production can be easily increased or decreased.
7. One has to toil hard to accumulate capital. It is man-made and not a free gift of the nature.
8. Capital is the outcome of saving because saving when used in productive activities is called capital.