The concept of capital means different things to different people. To the Economist, it means all man-made physical productive capacity. This includes money, factories, technology, machines, equipment and materials used in the production of goods and services.
Capital, in the economic sense, is one of the four factors of production, the other three being land, labour and enterprise.
To the business owner, it represents the total sum of money which can be devoted to business ventures. These funds represent the total sum of money which he/she owns or can borrow.
It is a scarce commodity and is expensive. Therefore it is essential that it is efficiently used. Over time a number of useful measures have been developed to assist business owners in discovering whether or not they are using their capital efficiently.
It may be invested in business in two forms:
- Fixed Capital, which represents the long term assets acquired by a business. These include buildings, machines and tools.
- Working Capital, which represents investments is assets which are rapidly transformed from one use to another. This includes raw materials which are changed by the manufacturer into finished goods. These in turn are sold and changed into debtors. These debtors are ultimately turned into cash.