Definition: Capital refers to the financial resources that businesses can use to fund their operations like cash, machinery, equipment and other resources. These are the assets that allow the business to produce a product or service to sell to customers.
What Does Capital Mean?
What is the definition of capital? This is a vital source of financing across all types of businesses because companies need these resources in order to operate. Businesses raise capital by issuing stocks and bonds to investors who purchase these financial instruments with cash or other assets.
It’s important to distinguish money from capital because they aren’t the same thing. Capital is more durable than money and is used to produce something and build wealth. Property rights give capital it’s value and allow it to generate revenues and build wealth. Equipment, machinery, patents, trademarks, brand names, buildings, and land are a few examples.
Let’s look at an example.
Example
Ana is the CEO of a large conglomerate that has various business lines in the insurance and energy industries. Her company wants to build a new energy plant that will need to be funded in the next year. A majority of her managers have come to her with multiple proposals for a total of $100,000,000. This is an extremely large expense that has to be funded this year in order to expand operations. In order to fund this, Ana must use a variety of resources including the cash and short-term investments that the company holds as well as sell company stock to new investors.
As a conglomerate, Ana’s company must be very conscious of the cost of capital that they source, and always strive for the ideal cost structure. She refers with her in-house experts, and determines that in order to raise the capital that her company needs, they will use $20,000,000 of cash available to the company, as well as $40,000,000 from the company’s AAA bonds, and issue $40,000,000 of new stock to investors.
Using these three resources; cash, investments, and company stock; Ana was able to raise enough funds to build the new plant that will generate income for the company and its new investors.
Summary Definition
Define Capital: Capital consists of the assets and resources, like cash and equipment, that a company can use in its operations to produce a good or service.
