Financial capital is a term for assets that can be converted into cash quickly, and that are used to cover the operating cost of a business.
An asset is a valuable resource that your business owns. Assets that can be converted into cash quickly, are called financial capital or liquid assets.
Examples of financial capital include bank deposits and cash, as well as stocks and bonds, which can be easily traded for cash. These assets are used to cover the operating costs in your business.
What is liquidity?
Liquidity is a term used to describe your business’ ability to convert assets into cash or to readily access cash. If you have enough cash to cover your operating costs, we say that your business has a healthy liquidity reserve or good liquidity.
This is vital for your business to survive and grow. Without good liquidity, you’re not able to make investments, purchase supplies or pay employees.
See also: How to improve the liquidity of your business
Different types of financial capital
There are many ways to increase your financial capital:
- Profit financing: This is the money you earn through the sale of goods or services. Your company can use the profit and reinvest it back into the business. To increase your profit, you can consider raising prices, chasing high-end clients, or taking on more work overall.
- Investment financing: This is the process of getting funding from external investors who are interested in the potential of your business.
- Debt financing: To get immediate capital, you can also try to get lines of credit from suppliers or a loan from a bank. You can also consider invoice sales or factoring—selling your outstanding invoices and getting paid immediately, minus a small fee.
- Equity financing: You can sell shares in the company, to get money from shareholders.
Additionally, you can liquidate your business’ fixed assets, and transform them into cash.
See also: How to handle outstanding invoices