Main Menu
Articles Home
Most Popular Articles
Top Authors
Submit Articles
Submission Guidelines
Link to Us
Bookmark
Contact Us





Translate this page
 


 
Home / Accounting

The Importance of Capital

By:John Nowly


In general, capital is a term used to define resources used to make money. Basically, you use capital to make something else. If you are interested in economics, there is a lot to learn about the concept of capital as an input into the production process.

But we are talking about accounting and finance for your small business, so we will lean towards the accounting interpretation of fixed capital. In practical accounting terms, you can think of fixed capital as fixed assets. The fixed capital assets are used to make something which is then sold for revenue. This is how you convert your capital to cash.

If you want to see your capital, pull out your balance sheet and look on the asset side. Do you see machinery, buildings, trucks, or trailers? If your balance sheet does not include that level of detail you may need to ask the accountant for an asset listing. For those of you who are already hands on, you may have created the asset listing yourself.

In addition to your fixed capital, you should have some working capital. The working capital is what you use everyday in operations - think of it as your on hand capital. Remember from our earlier discussions that resources like inventory and raw materials are assets?

If you take your current assets, like cash, raw materials and inventory, then subtract your current liabilities, like accounts payable, you will get your working capital. Hopefully, the amount of working capital you have is enough to get you through a few weeks of tough times. The working capital is what you need to manage everyday because if you do not, it will diminish and you could run out.

Running out of working capital is bad because that means you are off balance. Your assets, including cash, will begin to pale against your liabilities. It is not easy, however, to manage the working capital. It takes hard work and understanding. We will talk a lot more about working capital in lesson two.

Most small businesses begin getting capital when they first start out. You plan to make money and you need to have some capital to use in making money. Some small businesses can take off from the beginning and do not need another infusion of capital.

If your business is growing at a rate that lets you reinvest earnings and keep growing then you might not need to look for more capital. But some business plans require regular infusions of capital, especially in the beginning growth stages, to stay on target.

It is okay to need more capital so long as your growth plans and future profits can support the payback of more capital. Some capital is secured through collateral and is not really at risk until you can not make a payment and the equipment is taken away. This could have disastrous effects on related parts of your production system.

Digg del.icio.us Blink Stumble Spurl Reddit Netscape Furl

Article keywords: capital, finance, accounting, business, small business

Article Source: http://www.articles3k.com

ProfessorNow.comô offers free educational courses in an easy to follow format in various subjects. To view a free online course covering the subject of this article, please visit ProfessorNow.com.



Related Articles
  • 2). Accounting And Financial Accounting  By : Jason Uvios
    Accounting concerns a system providing qualitative information about finances. It may relate to maintaining of a chronological list of related debits and credits of a business

  • 3). Payroll Outsourcing Choices  By : Mike Batta
    There are many choices when it comes to payroll outsourcing. This article takes a look at the variety of outsourcing choices for payroll services.

  • 4). Merchant Accounts Aspects - About Merchant Accounts  By : Jason Uvios
    Merchant accounts refer to a special arrangement of a business concern with a commercial bank or card issuer. As per this arrangement the business concern is permitted to accept credit card payments and deposit those payments after deducting the charges to its bank account.

  • 6). The Nitty-Gritty Of Accounting  By : Sam Kern
    The basic aspects of accounting relate to correct classification of transactions. There are four major accounting heads: assets, liabilities, revenues and expenses.

  • 7). Final Statements  By : Sam Kern
    The starting point for the cash flow statement is the balance of cash at the start of the year. There are three segments in the cash flow statement: Operating, Investing and Financing.

  • 8). The Accounting Profession  By : Sam Kern
    Accounting records form the basis for several internal statements used in Management Information Systems. That is why, all managers need to have adequate knowledge of accounting principles.

  • 9). Tips On How to Make Profits Online  By : Sam Kern
    The best way to keep track of your profits is to make a financial plan and measure actual performance on a periodic, preferably monthly basis. This allows you to detect problems early and correct them quickly.

  • 10). Accounting And Quasar Software  By : Sam Kern
    Quasar has an intelligent design that allows friendly user interface to facilitate quick and easy data entry. Some accounting programs do not optimize keyboard use. They depend on selection of frequently used options through the mouse.



 


© 2013 articles3k.com - Privacy Policy