I’ve googled the definition of capital and it seems to have different meanings depending on the situation or context (business, economics, finance). The main thing that confuses me is whether it refers to money/funds or assets, or both… It would be great if someone could share a few definitions here, and describe how they are relevant to each situation, and how they relate to each other. Sorry for the noob question but really want to see if anyone could clarify this!
In: Economics
capital is the book value invested into a business by ownership. on a balance sheet a business can have assets like cash on hand and equipment, and liabilities like a loan or accounts payable. the difference between what you have and what you owe is referred to as owner’s equity in the business. that amount is also called ‘capital’.
capital is also a type of expenditure, basically money spent to increase the assets in the example above. so spending on a production machine is often called ‘capital investment’ while spending on payroll is just an expense.
capital is also loosely used to describe the amount an investor has to invest. this really originates from the first example too, but in this case its the free funds you can gather to make an investment. this use is related to the phrase ‘raising capital’.
There are several definitions whose use depends on context:
When an businessman or an accountant speaks of capital they are often discussing capital assets (the physical plant used by a business often subject to depreciation) but may be discussing invested capital (the equity and debt that financed the company).
Finance uses capital to almost exclusively indicate invested capital (the equity and debt that financed the business). Finance almost always uses liquidity to refer to money that a company can spend.
Bankers and bank regulators use capital to indicate something close to but different from invested capital, that’s important for their regulatory decision making.
Economics uses capital to refer to both, because they’re more interested in the returns the capital produces rather than the form the capital takes. To the economist a bank buying loans is the very similar to an industrialist buying machines, to them the interesting part is the return each of these will produce.
These all remain understandable to the different groups, because the investment capital is often used primarily to buy the physical capital that will allow the business to operate, so the difference between the two most typical definitions is often just whether the company has begun operations or not yet.
It refers to all assets, be those cash, property, equipment, buildings, etc. Basically, anything of value on the business’s balance sheet. We use it as a short hand for cash – e.g. “I need capital to start this business” – but that is just shorthand; capital doesn’t have to mean _just_ cash.
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