What Is Business Capital
This term is used in two different situations, one in the accounting and the other in the marketing situation. In accounting terms it is used to refer the amount of money that is invested in the business. On the other hand in marketing terminology it is used to refer the value of a company itself.
The sum of business capital that is revealed on the financial statements of a company is the total funds that are in the equity account. When any organization is newly set up the entire amount that is invested is allocated to the owners or equity share holders. Since the amount of money that is invested at the initial stage is huge the company value also increases. At the end of every accounting period the net loss or profit is added to this account. This can in turn increase or decrease the net worth of the organization.
The firm can raise the business capital in three ways; first can be the individual investment of the owners themselves, external investors and of course sale of shares. All the three options have their benefits or risks, the major risk will always be if they don’t operate properly leading to loss. The individual investment is better if it is in cash since this increase the business capital. External investment is usually from financial institutions; they provide capital and also maintain a portion of ownership sometimes. The third one by issuing shares the company increases the cash the company needs to run the business.
After the necessary cash is received this business capital can be used to purchase the necessary assets, pay for the office space, recruitment of staff etc. Since every investor will look forward to some kind of return on investment, the management should take a close review of the available options and chose the best one. In raising the necessary business capital it is always for an organization to follow certain rules to help them get adequate business capital:
What amount of business capital is required? The first question that comes to the mind is this one. The management to make a plan as to how much money is required and for what time. Time is very important to calculate the return on investment. The next step is to decide when is it required, always it is better is raise the necessary business capital much before you need them. Since the banking transactions for sanction of loans if the firm is opting external finance may take a longer time. Hence the sooner the better for the firm.
The organization also has to decide the different sources from which they can raise business capital. Whether the firm is investing money on its own or going to sell its shares for the public, hence it has to decide upon the mix of sources from which business capital can be raised. Raising business capital is not an easy job; if anything goes wrong at the initial stage then the company may have to suffer a huge loss.