What is capital and why is it necessary?
Capital is the cash or cash equivalent a person requires to start and run a business. In starting a business one needs the capital to acquire assets that will be used in generating revenue. The acquired assets are known as fixed assets.
Examples of fixed assets are like a factory for a manufacturer of goods or cooking and serving utensils for a restaurant owner.
Capital is also necessary to pay for the expenses and invest in other assets necessary for running the business.
What are the types of capital in a business?
The following are the types of capital that you may require to start and run a business;
Capital assets also known as fixed assets are the assets a person uses in the business over a long-term period to earn revenue. An example of fixed assets is a factory building and land on which the factory is located.
Working capital represents the liquid assets available to the business net of current payables. Liquid assets are made up of cash in hand and cash equivalent instruments and other assets like customer balances that can easily be turned into cash. Current payables are amounts outstanding to suppliers of goods and services payable within one year.
This is the capital the person raises by obtaining a loan from registered suppliers of debt capital and other sources repayable in a period of more than one year. It is also possible to obtain a short-term debt payable within a year.
Registered suppliers of debt capital are the financial institutions registered to mobilize deposits and give out loans among other things. It is also possible to obtain a loan from relatives, friends, and business associates.
These are mainly intangible or knowledge assets that enhance the capacity of the business to earn revenue and make profits. These include the skill set or expertise of the employees, the organizational processes or programs, and patents or copyrights among other things.
This represents the funds raised by their owners whether in cash or kind towards full or part ownership of the business. The equity capital is not repayable to the owners as is the case with debt capital and does not accrue interests.
What else do you require to start a business?
Apart from capital, a person needs the following to start a successful business;
1.0 Knowledge of business or entrepreneurship skills
For a person to venture into business must have the necessary skills, experiences, capabilities, and insight to enable him or her to successfully participate in the world of business. The key skills include the following among others;
- Strategic thinking;
- Business management;
- Positive mindset;
- Business acumen;
- Creative thinking;
- Financial literacy;
- Branding and marketing;
- Customer care;
- Teamwork and
- Sales skills.
2.0 Creative idea
This is the ability of a person to generate or recognize new and valuable ideas that may be useful in solving problems or overcoming obstacles in life.
A business idea is a creative idea that can be used to produce products or services that can be offered on the market for financial gain.
This is a study used to gather information about the target markets and potential customers to evaluate the viability of a new product or service to be produced using a business idea.
A business plan
A business plan is a roadmap that guides a person on how to structure, run, and grow a new or existing business that is focused on the achievement of its goals. In summary, the business plan contains the following;
- The background;
- Market analysis;
- Competitive analysis;
- Management overviews,
- Products and services;
- Marketing and sales plan; and
- Financial projections and evaluation.
Is an entrepreneur born or trained?
A person is not born with business acumen but with the unprogrammed mind which is subsequently programmed by the environment one lives in.
From the environment, a person can pick a lot including a positive mindset attitude toward business, and the right entrepreneurship skills referred to above. A positive mindset attitude and business knowledge can be formally taught or informally acquired.
They can be informally obtained from relatives, friends, mentors, books, and increasingly from the internet. It is also important to note that studies have indicated that human beings are born with human personalities and temperament traits that are shaped by both genetics and the environment.
The traits enhance the chances of success. But there is still a lot of room to develop other personalities and temperament traits as one experiences life.
The challenge is one has to learn how to apply the traits in the right way and at the right place.
Is capital a prerequisite for venturing into business?
It is a misconception for some people to think that they must first accumulate capital before they venture into business. The logical question to ask yourself is to accumulate capital for what?
The starting point in venturing into business is not capital but developing viable ideas. Capital is mobilized to implement viable business ideas. Capital is not attracted by all businesses in general but by businesses that are implementing viable business ideas.
The amount of capital is determined by the business idea you wish to implement. Venturing into a hospital business requires more capital than venturing into a restaurant business.
With the above in mind, a person can start a business with any amount of capital, and the shortfall if any can be mobilized from other suppliers of capital.
Sources of capital
The common sources of capital generally available in Uganda include the following among others;
- Personal savings;
- Borrowing from financial institutions;
- Borrowing from relatives, friends, and business associates;
- Issuing of shares; and
- Issuing of a long-term bond.
Capital is necessary when a person is venturing into business but it is not a prerequisite for venturing into business. A lot of concentration should be on developing viable business ideas that form the starting point of venturing into business. Viable business ideas attract capital from all sources.