Capital gives entrepreneurs and business owners a true sense of what they have to work with when they start up a new business. Working capital is defined as current assets -- including cash, outside income, and inventory -- minus liabilities, such as bills, debt and expenses. For example, if you have $50,000 to start a new T-shirt business, but you need to pay off your personal vehicle and college loans first, totaling $15,000, then your working capital is $35,000. That's the amount you have to work with to start up your business.
The most important feature of capital in the field of economics is the role it plays in helping entrepreneurs plan for their immediate financial needs. There's always some risk in starting up and maintaining a business, but a careful assessment of capital can help you decide if moving forward with your business plan is a good idea. You must ask yourself and find the answers to key questions: How much capital do I need? Can I convince lenders and investors that I have enough start-up resources to turn the business into a money-making venture? How much capital can I likely raise from outside sources?
A sufficient amount of capital helps you stand out as a viable and well-prepared borrower. For example, you might need to borrow $25,000 from a bank or an investor to renovate a building that you plan to use for your new car wash business. If you already have $100,000 in cash and $30,000 in assets such as high-tech car wash equipment and car cleaning products, the borrower will likely view you as a low-risk investment. Your working capital is enough to get the business up and running and pay back the renovation loan, even if the car wash isn't as profitable as you'd hoped.
Even though the term "capital" typically refers to money and tangible financial resources, it also applies to human capital. For example, education, work training, professional development, and investments in health care tend to have positive impacts on people's work lives. As a result, your company might experience production increases, positive customer service reviews, repeat business, fewer personal accidents and injuries, and increased long-term earnings. Human capital is important because it ensures lenders and investors that your workforce will remain strong, healthy and highly competitive in the marketplace.