Sources of Capital for Businesses (I)
Capital — According to The American Heritage Dictionary, 2nd Edition 1985, capital means "wealth in the from of money or property owned, used, or accumulated in businesses by an individual, partnership or corporation. The remaining assets of a business after all liabilities have been deducted; net worth. The funds contributed to a business by the owners or shareholders.
Fundflow / Cashflow — The cashflow concept reflects changes in the sources and uses of funds employed in an organisation, by looking at what those funds are required for, and from where they could be sourced.
Capital is a "liability" — Fund raised are shown as liabilities in the balance sheet. The uses of funds are reflected as assets. Shared capital is considered as a liability too since the money would have to be repaid to the shareholders or investors by the company.
Permanent / Long-term Capital are issued from 2 main forms:
- Ordinary (equity) shares, with voting rights and the expectation of a fair rate of return. The shareholders assume the risks but share the rewards. They are really the owners of the business. They exercise control through a board of directors appointed from among their number.
- Preference Shares, with a prior claim to dividend. After ascertaining the total annual profit earned, the preference shareholders, if any, are paid their fixed dividends. What remains of that total becomes the property of the ordinary shareholders. Part of it is distributed to them as dividends and the rest ploughed back into the business to help further growth and the making of future profits.
Public Capital Market — A company secretary is concerned with the legal and administrative intricacies of dealing with the registration of new capital issues. New capital issues are undertaken using an issuing house, offer fo sale and private placing by brokers, tenders, rights issues or bonus issues. The board and management look at the advantages of going public and the status of having a stock exchange quotation. It is also a more permanent and relatively cheaper source of funds than perhaps outright borrowings from a financial institution.
Ordinary Share Capital and Total Capital — The ratio between these two capital is defined as "gearing". High gearing infers that the ordinary shareholders constitute only a small proportion of total capital. This represents a speculative investment for those shareholders. The reasons are:
- In bad year, preference shares and other long-term capital would absorb the profits through their fixed interest claim;
- while in a really good year, the balance of profit available to be shared among a relatively small number of ordinary shareholders could be considerably large.
