Do you need capital for your business? First, let’s explore the concept of capital
and see what it is all about. Basically, you
need capital in order to produce certain
goods or in order to create and maintain the proper environment for offering certain
services. The study of economics will reveal far more details about the role of
capital and why business owners need capital when starting up. Let’s look at capital
from an accounting point of view. We have two types of capital: fixed capital and
working capital. Fixed capital can be interpreted as fixed assets. You
need capital
in order to produce something and sell it in the future.
That is how capital is converted into cash. If you want to take a look at your fixed
capital, view the asset side of your balance sheet. You
need capital such as trucks,
trailers, machinery or even buildings in order to create a revenue-generating environment.
If you do not have an asset side on your balance sheet, you can ask your accountant
for an asset listing, or you may have even created that listing yourself, if you
already have a hands-on approach to accounting. Working capital, however, is the
capital used in everyday-operations when running your business. Raw materials and
inventory are considered assets (fixed capital).
Aside from assets, having some
working capital (or on hand capital, as it could
also be called) is extremely important as far as your everyday-activities are concerned.
Take the assets you currently have, ranging from office buildings, transportation
vehicles, office furniture to raw materials and subtract liabilities, such as accounts
payable, and you will be left with your working capital. You need capital if you
want things to function smoothly with your business, that’s why it is recommended
that the amount of working capital you have at your disposal is enough to ensure
at least a few weeks worth of activity within your company. You need capital to
avoid being off-balance. If you run out of
working capital, your assets (yes, even
cash), will decrease and liabilities will affect your business more and more.
Managing your
working capital is not something you can earn right away, but it is
a vital part of running your business. As a small business owner, you need capital
when starting out. It takes money to make money. Depending on how your business
develops, there may be no need for another infusion of capital in the future if
your company takes off. You also need capital while growing your business. If your
business grows in a way which allows you to reinvest a part of your earnings then
you may not
need capital from other sources in the future. In some cases, however,
a regular influx of external capital is required in order to keep things on the
right track at the beginning.
It is not wrong to
need capital. If the payback of that capital can be supported
as your business develops and your profits increase, then your risk is justified.
In some cases, collateral secures the capital, and you are not actually risking
anything unless you reach a point where you cannot make payments, in which case
the assets will be taken away from you. And you need assets in order to continue
the production process, so that you need to exercise prudence and avoid potentially
unpleasant situations.
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