Types of Capital: Forms of Capital & Examples of Capital
Aug 26, 2021
As you begin to seek funding for your business, exploring the different types of capital will allow you to make an informed choice. Within this context, capital refers to anything that benefits the owner, from economic assets to holdings such as intellectual property. If you can invest resources in something else to increase business profits, those resources are capital. In this guide, we explore and provide examples of three primary forms of capital: Financial capital, natural capital, and human capital.
Reviewing the facts about financial capital
Sometimes called investment capital or simply capital, financial capital is the funding you need to run your business. It covers the cost of inventory, equipment, real estate, marketing, and everything else you need to run your business. Financial capital examples include cash, credit lines, and stock holdings. Even hard company assets such as real estate are an example of financial capital when converted to cash flow.
Businesses have two main options for acquiring financial capital:
- Debt financing, which involves selling company bonds to investors in exchange for repayment on a regular schedule with interest, as well as traditional business loans and credit lines
- Equity financing, where you sell shares in the company’s future profits to interested investors, who may also have a stake in the firm’s operations
Access to these and other examples of financial capital provides an important measure of a company’s economic health. Financial capital has to cover the cost of working capital, which encompasses the daily operating expenses of the business. To calculate available working capital, you can either:
- Subtract the company’s current liabilities from its current assets; or
- Add the available inventory and accounts receivable and subtract the outstanding accounts payable
The main components of this form of capital—assets, debts, and equity—are outlined on the firm’s balance sheet and give insight into key performance metrics such as your company’s return on equity, debt to capital ratio, debt to equity ratio, and weighted average cost of capital (WACC), which measures how much your company pays to access financing.
Some experts define financial capital as internal economic capital. They designate external economic capital as other, different types of capital, including those described below.
Assessing reliance on natural capital
This type of capital is perhaps the most often overlooked in the corporate sector. Every business uses resources derived from nature, from forested paper goods to fresh water and fuel. Regulatory processes such as environmental licensing are also considered natural capital. The Corporate Finance Institute designates ecology, vegetation, animal life, and commodities such as minerals and oil as the four main categories of natural capital.
Understanding the value of this so-called natural capital can help ensure the sustainability of your business. When we consider natural resources complementary and take them for granted, we threaten the foundations of our economic stability.
The nonprofit organization Conservation International has developed a framework businesses can use to value their natural capital through its Capitals Coalition program. The Natural Capital Protocol outlines a process that involves:
- Determining how the company’s objectives depend on and impact natural resources
- Measuring the extent of these impacts and dependencies
- Collecting data about changes to the business model or operations to reduce these dependencies and impacts
- Measuring the resulting impact on natural resource reliance
Examples of common business impacts on natural resources include waste disposal, gas and chemical emissions, water and land use, and environmental disturbances such as light and noise pollution. In addition, your business may require natural capital for raw materials, recreation purposes, energy, water, utilities, and protection from floods and storms.
Evaluating the use of human capital
Employees are the prime example of this type of capital, which also encompasses each person’s knowledge, skills, experience, intellectual property, and other skills and characteristics. The Corporate Finance Institute divides human capital into a few subcategories, including social capital, skills-based capital, physical capital, and intellectual capital.
The Capitals Coalition has also developed a Social & Human Capital Protocol to guide the analysis of your business’s impact and dependence on individuals and societies. It follows a similar process as the Natural Capital Protocol but shifts the focus to corporate reliance on human resources.
The Forbes Tech Council stressed the importance of attention to this type of capital in the changing economic landscape in an editorial published in late 2020. Its author highlights the new Securities and Exchange Commission rule requiring public corporations to report human metrics alongside their financial health metrics. While key performance indicators for human capital use vary by industry, common questions to start your analysis may include:
- Are you able to attract qualified candidates for open positions?
- Is your hiring rate stagnant, or has it increased as the company grows?
- Do you struggle with absenteeism?
- Do you have a high turnover rate?
As noted by Forum for the Future, a healthy economy requires investment in human benefit, education, reward, training, and motivation.
Successfully managing one form of capital can often facilitate success with other types of capitals. For example, investing in green programs that decrease reliance on natural resources can attract young workers—the Forbes Tech Council reports that 40 percent of this age group surveyed said they’d take a pay cut to work at an environmentally friendly firm. By evaluating and tracking how well your company uses these three forms of capital, you can create a sustainable foundation for growth.