Understanding 6 different types of capital

6 different types of capital

Business Capital and its six types


Capital in business:

Capital refers to the financial assets, measured in terms of money, used by enterprises to produce their finished products or to render services to the economy. These include the funds deposited in the accounts or various funds obtained from various financial sources. Capital is a key component in the success of the business and on the macro level, for the growth of the economy. The capital can be generated internally in the form of retained earnings or it can be procured from the external sources. Externally, the capital can be raised through Debt or Equity financing. However, external sources of finance come with a cost of Interest. Capital is used by the businesses to start, maintain or expand the business. The sources of capital can be long term, medium term or short term depending upon the time period for which the capital is raised.

Different sources of capital include:

  • Share capital
  • Debenture
  • Project Finance
  • Collateral loans
  • Retained Profits
  • Leasing
  • Term loans
  • Factoring etc.

However, besides the use of financial capital in the business, there are various other forms of capital used in business organization as business can’t run without availability of various other resources which forms the part of capital of organization.

Article Summary

The main focus of this article is on discussing the capital in business where capital refers to the financial assets. The article also provides the detailed knowledge regarding different types of capital such as financial capital, human capital, social capital, intellectual capital., reputational capital etc., which are very important to understand by the business organizations.

Six different types of capital:

There are six types of capital that are used in business firms to manage various business operations in successful direction. Following is the detailed description on each type of capital used in business:

  • Financial capital:

    Financial capital of organization is the base for initiating the business and gathering various other resources of organization (Jim, 2013). Financial capital in organization can be gathered from two sources i.e. debt and equity. The debt capital of business include funds gathered from various external sources. This capital has a fixed redemption period and refers to the funds borrowed from some outside agency whereas the equity capital of business denotes the capital owned by business firm through purchase of shares or equity stock. Further, funds in organization can be borrowed for short, medium as well as long term. Long term sources of capital are those sources having a redemption period of greater than 7 years and generally include Equity share capital, Mortgage Loans and Debenture. Medium term sources usually have a time period between 2 years and 7 years and its major sources include term loans, Leasing and hire purchase agreements. The short term sources, as the name suggests, have a time period of less than 2 years and generally include Bank overdrafts, Deferred expenses, factoring and trade credit. The companies must decide on the term and the type of the capital the enterprise must use to finance their assets to carry on the business. Further, the financial capital of Nestle India Ltd totals to around Rs. 3708.88 crore where the debt of organization totals Rs. 35.14 crore and shareholders funds of company is Rs. 3673.74 ("Nestle India Ltd balance sheet | Financials | Capital market", 2019).

  • Human capital:

    Human capital comes from staff members of the organization and refers to the skills, knowledge and habits of staff members that helps in accomplishing various tasks in most productive manner. Human resources being the important asset of organization lays down the basis for human capital of company. There are various departments in organizations and each department is headed by a department head who helps in accomplishing department operations and also helps in keeping team members motivated to various work outcomes. Thus, staff members and their skills have been identified as key factors of human capital that helps in influencing positive outcomes in organization. It also refers to the investment made by organizations in their human resources to increase organizational performance and productivity. Staff members of organization also helps in influencing creativity in organization through higher skill base. Along with this, human capital has encouraged various other Capital such as knowledge and social capital. For instance, skilled and experienced staff of Samsung forms significant part of the business capital as Samsung through its innovative and experienced staff members regularly adopts number of innovations.

  • Social capital:

    Social capital of the business refers to the societal resources available to business firm. It also refers to the social relations employees or team members develop with each other while working in the organization (Kline, 2019). The social capital of business refers to teams and group of individuals that works together to achieve profitability and to maintain the successful running of the business. Further, diversity, corporate social responsibility towards society, health and safety of employees, participation in decision making, sense of belongingness etc. frames the social capital of organization. For instance, the relationship developed by the organization team members helps in development of better harmony and team collaboration. Further, joint venture or partnership of business firms with other organizations also is part of the social capital of the organization.

  • Intellectual capital:

    Intellectual capital is the intangible value of the business that helps in achieving competitive advantage in industry. intellectual capital includes various other capital such as human capital, structural capital, relational capital, etc (Intellectual Capital, 2019). Following figure shows the main types of capital that forms part of the intellectual capital:

    Intellectual capital

    Source: https://sites.google.com/site/piacapitalintelectual/intellectual-capital

    The above figure provided that human capital, structural capital and relational capital are subset of the intellectual capital. Further., it has been identified that it includes all the non-intangible resources of an organization that contributes to the value proposition of an organization. it also include the skill, creativity, and intellectual property of business. Gathering intellectual capital is not enough for business organizations. Business firms must take initiatives to measure and manage their intellectual capital. For instance, acquiring patents or copyrights is not enough for business organization. It is must to properly organize the patents of organization to make them inimitable and to develop permanent competitive advantage.

  • Natural capital:

    The natural capital of business organization refers to all the natural resources that are used in business to produce various goods and services. Natural capital refers to the environmental stock and may be used for environmental accounting. Also, natural capital has the financial value as the income derived from the use of natural resources forms part of the business income and increases the profitability of business organizations. For instance, business firms may use natural capital to produce various commodities such as minerals, fish stocks or timber. The natural capital of business organizations may also be used to reduce negative impacts on environment (Natural Capital, 2019). in addition to this, usage of agricultural land for business purpose is also the natural capital of business organizations. Further, Woolworths also has taken number of measures to protect its natural resources (woolworths, 2019).

  • Reputational capital:

    The reputational capital of business also forms part of the capital structure of an organization as the reputation of organization can also be measured in quantitative terms. This capital is sum total of various intangible resources of organization and may include patents, copyrights, quality, trademarks, sustainability, etc. Following figure shows the reputational capital of business organization:

    Reputational capital

    Source:https://www.humansynergistics.com/blog/culture-university/details/culture-university/2017/04/26/culture-a-key-determinant-of-reputational-capital

  • The reputation of business influences the successful operations of organization as it also refers to the trust that customers have in the products or services of organization (Suh & Amine, 2007). following figure shows the culture or reputational capital of organization that helps in maintaining huge profitability by gaining larger customer base. Thus, organizations must take measures to develop effective relations with their employees, customers and community. Further, the reputational capital of business also helps in maintaining success in the industry. For instance, reputation developed by Apple Inc. by developing trust among customers has helped in gaining larger customer base and also helped in charging premium price from its customers. Further, the brand loyalty of apple has helped in maintaining successful business operations ("How Apple’s reputation has improved over time |", 2019).

Conclusion

The above sections of the report have helped in identifying various types of capital of business organizations. Along with the above discussed capitals of organization, there are various capital such as manufacturing, educational and knowledge capital. Capital of business organizations have been identified as the key factor for achieving success in competitive market. Further, it has been identified that each capital type of business organization can be measured in monetary terms as each type of capital helps in maintaining and increasing profitability in organization.

References:

Article By:

David Richard

Having a masters degree in Technology Management from the University of Illinois, David Richard works as a Management faculty in the University of Toronto. Being a technology freak, he does not like to be shacked, so he keeps on experimenting new ideol


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FAQ


What is capital for a small business?


Q

The capital for small business is the money which used to buy inventory, pay rent and other operational activities of the organization. Further, the capital for business can be defined as the financial asset that can be used for running the business.


What are the 6 types of capital?


Q

The six types of capital include financial capital; human capital; manufacturing capital, social capital; intellectual capital and natural capital.


Why is capital important in business?


Q

Capital is must for every organization as it is the measure of the ability of the organization to pay off short term as well as long term expenses. Further, the capital is an important part of the assets of the organization that is used to repay its debtors, buy assets, etc.