What Is Capital And Kinds Of Capital?

There are two kinds of financial of capital requirements of a business. One of them is the capital which is required by a business to own durable assets such as building, land and machinery. This type of capital is called fixed capital or startup capital. The second capital is required for investment in short term assets such as purchase of raw material, payment of salaries, wages and rents. The capital is termed as current or working capital. Fixed capital as the name signifies is the fund which is used for meeting the permanent or long term needs of the business. Before a business is carried out the long term needs of a business are land, building, equipments and other sundry expenses.

Circulating or working capital is the fund which is invested in current assets of a business. The current assets of a business are cash on hand, current deposits, readily marketable securities, inventories of goods and accounts receivable. Circulating capital is also sometimes called revolving capital because of the constant turn over of funds. The working capital is required for the purchase of raw material, salaries, wages and other day to day expenses. So this is also called operating capital or working capital for the business.

Capital:

In simple words the term capital means the amount of money invested by the owner in the business to start a business. In case of Joint Stock Company the term share capital refers to the amount of money raised by the issue of shares.

Kind of Capital:

Authorized Capital:

The authorized capital is also called nominal or registered. This is the maximum amount of capital which a company is authorized to issue. The amount of authorized capital is mentioned in the capital clause of memorandum of association along with its division into shares of fixed amount.

Issued Capital:

Issued capital is that part of authorized capital which is offered to the public for subscription or for the sale of shares. For example, if the authorized capital of a company is 10 Million and the company issues shares valuing 7 million $ then the issued capital of the company is 7 million $.

Un-issued Capital:

The Portion of the authorized capital, which is not offered to the public for the sale of shares are known as un-issued capital. In the above example the un-issued capital of the company is 3 million $.

Called-up Capital:

The part of the subscribed capital, which in fact the company asks the shareholders to pay, is called the called up capital.

Talking about Circulating capital or working capital is the funds which are invested in current assets of a business. The current assets of a firm are cash on hand, demand deposits, readily marketable securities, inventories of goods and accounts receivable. Circulating capital is also sometimes called revolving capital because of the constant turn over of funds. The working capital is required for the purchase of raw material, salaries, wages, rent and other day to day expenditure.

The circulating capital required by a firm depends upon a number of factors such as nature of business, rapidity of turn over period, length of period of manufactures, etc. in retailing services, for instance, the working capital can be rapidly recovered by the sale of goods. The requirements of working capital are, therefore, rather small in this business. A manufacturing concern, on the hand, has a slower turnover of circulating capital. Therefore, it needs larger amount of working capital to carry on business. In banking, the requirements of funds for working capital are very high.

Short term financing is better suited to satisfy the circulating capital needs of a business, short term debt financing includes debts which have a maturity date of less than one year. It may here be noted that there is a minimum level of working capital current assets which is always needed by a firm during periods of an operating cycle. This can be called as permanent investment of the firm in current assets. The funds needed above this permanent level du8ringa year may be regarded at temporary needs.