Capital is a company's financial resources that help it function and grow. It includes cash in a company's bank account as well as accounts receivable, near-cash, equity and capital assets. It also includes intellectual property and human capital. Businesses use capital to create value, which can include goods and services.
Assets are things a company owns that have economic value and are expected to provide future benefits. They're listed on a balance sheet, along with liabilities and stockholders' equity. An asset can be tangible or intangible. Tangible assets can be converted into cash or sold, while intangible ones cannot. A business's assets can be classified by how quickly they can be converted to cash, their physical presence and how they are used. These classifications are important to understand how a company operates and its financial health. Intangible assets, such as patents and copyrights, are not tangible but theoretical items that allow a business to make money through their use. Other intangible assets include trademarks, brand equity and reputation. Assets are a crucial part of a company's financial health. They can help a company qualify for loans, work through bankruptcy and calculate tax liabilities. They also play a critical role in understanding cash flow and working capital. Liabilities are financial obligations to other people or businesses that need to be paid. You'll find liabilities on your balance sheet, a common type of financial statement generated by accounting software. A business's liabilities include accounts payable, wages owed and loans owed. They can also include tax payments and insurance premiums. Companies typically organize their liabilities into two categories: current liabilities and long-term liabilities. Current liabilities are debts that need to be paid within a year. Non-current liabilities, on the other hand, take more than a year to pay off. These include debts like mortgages and business loans, deferred tax payments and long-term leases. Keeping track of your liabilities helps you ensure that you have enough cash to meet your financial obligations. It can help you decide how much to borrow and whether or not to expand your business. In general, it's best to have a lower amount of liabilities than assets. However, this depends on the situation and your financial goals. Working capital is a financial metric that measures a business's ability to pay short-term liabilities. It is often used to measure a company's operational efficiency and to help fuel growth and make businesses more resilient. Working capital can be positive or negative and changes based on factors outside of a business's control. For example, accounts receivable may lose value if a top customer files bankruptcy or inventory can become devalued due to obsolesce or theft. A business's working capital also depends on its accounting practices. Generally, companies need to safeguard their assets and ensure they are being recorded correctly. To calculate working capital, a company subtracts current liabilities from current assets. The resulting number is referred to as the working capital ratio, and it can be an indicator of future liquidity problems. A ratio below one is considered bad, while a ratio of 1 to 2 is ideal. Total capital is the sum of debt and shareholders’ equity and can be found on a company’s balance sheet. It is a good indicator of a company’s financial health. A business can acquire capital by borrowing or obtaining it from private and government sources, such as banks, credit card companies, and federal loan programs. This type of capital typically requires repayment with interest. Economists look at a company’s capital to assess how efficiently it is using its resources. A healthy company will have a mix of debt capital and equity for its daily operations, as well as working capital for future growth. Capital employed is a key metric of how well a company is using its capital to generate profit. It is calculated as the company’s fixed assets minus its current liabilities or as ((fixed assets + current assets) - current liabilities).
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