In economics, capital is the property of an individual or legal entity, expressed in monetary terms (sometimes commodity). There are several options for using this property:
- For private purposes.
- For conservation (purchase of antique products or luxury items).
- To increase.
Term development
Financial (monetary) capital is a resource of economic life, which consists of financial (monetary documents and cash and non-cash funds) and real capital (resources invested in all kinds of economic activities). Economists interpret the concept of "capital" in different ways.
Economists interpret the concept of "capital" in different ways. Many of them believe that this concept is much broader than just “money”. For example, Smith characterizes capital as a specific stock of money supply and things. Goes further than Ricardo. He interprets capital as a material reserve of means for production. At the same time, he believes that it is possible to increase the price of capital exclusively by labor. The economist Fisher interprets capital as creating services that generate profit.
As a result, the financial structure of capital is a certain sum of goods expressed by mental, material and financial opportunities that are used to increase the number of goods produced.
Capital in the theory of accounting, recognized all the funds invested in the assets of the organization or company.
In the modern theory of economic terms, financial capital is divided into real, expressed in a highly intellectual form and material, and money (financial), expressed in cash and non-cash funds and securities.
Modern economists insist on another form of capital - human. It develops due to the contribution to the health and education of workers that make up the labor resources of the enterprise.
Basic concept
Financial capital is cash and non-cash funds that businessmen invest in business. Production has a demand not only for material capital. First of all, cash and non-cash funds are temporarily not employed in production. They are necessary for capital goods.
Farms or organizations, not fully using the income received for current needs, save part of the money. They, through financial markets, enter other farms or organizations that use them to purchase capital goods. Thus, investing occurs. The company that used the capital of the company that kept it pays the loan interest. This percentage is the price of financial capital.
In economic science, it is believed that financial markets have perfect competition. This means that neither savings companies nor firms that received investments have the ability to influence the interest rate by changing the amount of invested savings or changing the demand for them. Thus, the isostatic market interest rate is formed in the course of fair competition for both investors and savings companies.
Demand for financial capital is a function of the interest rate on an investment. The lower the fee, the greater the amount of investment. The number of offers from savings companies also depends on the interest rate: the higher it is, the higher the amount of savings.
The content of financial capital
Financial capital is recognized as cash documents and cash and non-cash funds. Moreover, valuable documents as a category are fully recognized by financial capital. Cash and non-cash funds cannot be fully considered as such. The financial mass in the hands of citizens of the country, at the cash desks of various enterprises and firms, as well as the key part of funds in current accounts in banks (as it is used for conducting purchase and sale transactions), is not considered to be financial capital. Only a part of these funds, laid down in installments or in advance, can fall under the category of “financial capital of organizations”. That part of the funds of organizations that is used as pension or insurance savings may also be a share of financial capital.
The diagram shows an approximate scheme of financial capital.
Economic background
The formation of the economic category “financial capital” is provoked by the need for economic turnover. Considering the model of the circulation in the economy, it can be seen that organizations for the costs of paying economic resources and current expenses store the share of their assets in current accounts in banks and in cash, and partly in monetary documents and on deposits in banks for future expenses. Households also accumulate savings and make various payments, including taxes. For these purposes, they also open bank accounts, deposits and have securities. The state, as a representative of economic life, makes payments for services, grants and goods, executes state money transfers and prints its securities. By participating in the economic circuit, funds, insurance and pension, reduce the risks that arise in the course of social and economic activities, while keeping some of their active funds temporarily unoccupied.
Modern realities
In today's economic cycle, financial capital is real capital. This is due to the fact that securities and money supply are transferred to tangible current assets and fixed assets.
Here it must be taken into account that not all financial capital flows into real capital. For example, some households in our country keep part of the active funds in foreign currency at home. The turnover in the economic sector transfers the share of real capital again to financial capital. This can happen, for example, due to a decrease in fixed capital due to depreciation deductions, which are deposited with banks. In addition, financial capital is constantly supplemented by financial injections (the same purchase of securities). It follows from this that financial capital works in parallel with real capital.
Financial resources form
As is clear from the above, financial capital is the share of the financial resources of an organization that is in circulation and brings a certain income. That is, these are advanced and (or) invested resources aimed at making a profit. The financial capital of an enterprise is the basis on which the organization is created and developed. It is capital that characterizes the total value of the enterprise’s assets in intangible and tangible form and investment in assets.
In the process, capital serves as a guarantor of the interests of the organization and the state. Therefore, it is the main object of financial management of the organization, and managers of the financial department are required to monitor the high efficiency of its use.
Signs of financial capital
Financial resources and capital are interconnected. Based on this, there are several signs of financial capital of the organization.
Affiliation
Here, the capital differs in equity and debt. By equity you can judge the total value of the assets of the enterprise (which are subject to the ownership rights of the enterprise). It includes reserve, additional, authorized capital and retained earnings.
The authorized capital or share capital is the minimum amount of own property, which is a guarantee for creditors. Its size is stipulated in the charter of the organization (the minimum is set at the level of federal law).
Additional paid-in capital consists of the amount of the revaluation of tangible property of the enterprise, the useful life of which is more than a year. Also included in this capital are gratuitous values received by the company, amounts earned in excess of the minimum value of the placed securities and other amounts of money falling into this category.
Reserve capital is the accumulation of deductions from profit for an unforeseen event: possible losses, repurchase of shares, etc. The size of the deductions is regulated by the charter.
Financial capital is the profit of an enterprise, which is practically its most basic part.
Borrowed capital - cash or other values that are attracted on a repayable basis to improve the organization.
Investing
On the basis of investment distinguish between working capital and fixed capital.
Part of the capital invested in fixed assets and non-current assets, and constitutes fixed capital. Financial capital includes working capital.
All tangible and intangible assets included in the financial capital of the organization are in constant circulation. Based on this, we can divide it according to the form of location in the next round of turnover. This is a monetary form, productive and commodity.
Monetary form is an investment. Investments can be in both external and current assets. In any case, they become productive.
At the production stage, capital goes into the form of goods (work, services).
The third, final stage - commodity capital is converted into money through the sale of goods (services or works).
In parallel with these movements of capital, its value changes.
Financial management
This function usually lies with the enterprise management department and means managing your own financial flows. For this, the organization must have a long and short-term financial policy. Its main focus should be the attraction and proper distribution of financial flows.
Financial capital management is designed to solve several basic problems.
- Determination of the rationally necessary amount of equity capital.
- Attracting (if necessary) an undistributed part of the profit or issuing shares to increase the amount of equity.
- The formulation and implementation of the dividend policy and structure of the additional issue of shares.
The development of financial policy takes place in several stages.