Understanding Capital: History, Types, Sources, and Benefits

Definition of Capital – “Where to get capital from?” We often hear these questions when dealing with the business world. The existence of capital is very necessary to start a business. Without capital, it is impossible for a business unit to run and grow.

Both small-scale and large-scale businesses still need capital in order to carry out their business activities. So what is the meaning of capital when viewed from a general perspective? And how important is the existence of capital? Reader, now is the time to talk about capital.

Definition of Capital

There are many experts who express their opinions about capital. Let’s discuss one by one, Reader.

1. Bambang Riyanto

The professor from the Faculty of Economics and Business explained that capital is the result of production that in the future can be reused for further production . In its development, capital is emphasized on value, and buy, or as a collectivity of capital goods.

While what is meant by capital goods are all the goods in the company with all their productive functions to generate income. In other words, capital is the power to manage capital goods.

2. Lawrence J. Gitman

The author of the book Principles of Managerial Finance states that capital is a specific term loan charged to the company. This can be seen in the financial balance of the company on the right side, in addition to the obligations that must be borne at this time.

3. Drs. Moekijat

This country’s administration experts have the view that capital is all the things owned by the company. Starting from cash, credit, manufacturing rights, patents, machines for operations, office inventory, digital assets, property, business facilities and equipment, brands, resources, and all things that are valuable but cannot be divided.

In practice, capital is often viewed from the total ownership of the company. These rights consist of a certain amount of funds, surplus, valuable resources, and indivisible profits.

4. Jacob Louis Meij

Professor of Business Economics Groningen University as well as a business economist in the Netherlands believes that capital is all the goods in a company’s household that can be collected to generate income. This can be seen in the balance on the debit side.

Meanwhile, wealth is the purchasing power that is in various capitals. Its position is on the credit side of the balance sheet.

5. Big Indonesian Dictionary (KBBI)

According to KBBI, capital is a fund that can be used as a parent or fund to do business, release money, and so on. In other words, capital is property (can be in the form of funds, goods, etc.) that can be used to produce something that can increase wealth and profit.

Still according to KBBI, capital can also be interpreted as something that a person or company uses as supplies to work, fight, and so on.

If we conclude, capital is all the things we have in the form of money, goods, other assets that we can use to generate profit in running a business. In practice, capital can be categorized into several types, such as cash and non-cash fund capital, debt – receivables, enthusiasm, knowledge, relationships, skills, confidence, brands, ideas, etc.

So Reader, can we move on to the next point? If not, Reader can try re-reading in a calm condition and good mood . If so, let’s move on to the next point.

Capital History

The capital can be obtained through working by hunting, studying, poetry, farming, mining, working in people’s companies, and so on. Then the capital is sold or bartered with something of equal or higher value, or processed first. From the accumulated capital one can do business activities.

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Sometimes, a person has capital in the form of skills and things that cannot be monetized. On the other hand, there are other people who have capital in the form of money but cannot run a business, either because they are busy or because they are not experts in the business. So the cooperation between one party and another started to run a business together based on the capital they each have.

If the cooperation spreads to the public, then the capital market appears. It’s called the capital market because the public can be the capital of a company without having to get to know the business owner. Then the capital owned by the investor can be sold to other investors. Now, let’s look at the historical record of the capital market.

1. The First Revenue Sharing System Practiced by Publicans (Years ±3 BC)

The first revenue-sharing system recorded by history was a joint business run by the Publicans during the Roman Empire. Publicans are people who do business (capitalist average) as general contractors. They became providers of services required by the Roman government, such as providing military needs, collecting taxes, and building public facilities.

At one time, the Roman Empire was busy strengthening the military so tax collection was done by the Publicans. The tender system used at that time was won by whoever was able to give the highest bid in giving taxes to the government. The profit is obtained from the difference between the tax they collect and the nominal amount deposited to the government.

This project is very risky and requires a large amount of capital, so the Publicans joined forces. If the amount of property accumulated is smaller than that deposited to the government, the loss is borne by many people. If it is profitable, then the profit share is adjusted to the amount of capital invested in the beginning.

2. The First Stock Document in the World

It was Stora Kopparbergs Bergslag that recorded its name as the first company in the world to issue share documents. Copper mining in Falun, Sweden has been started since the 850s by local residents partially.

On June 16, 1288, the King of Sweden confirmed a document called the Deed of Exchange. The document is the first written document about the fare. In this document it is stated that A. Peter a bishop gets an eighth of the mining revenue. The existence of the division of mining revenue shows that the share document has existed since that time.

At that time, the mine was managed and administered by a well-organized organization. No longer run by local residents, but run with an integrated system. The organization is named Stora Kopparberg.

3. The First Capital Market in the World

Reader must be familiar with the company name Vereenigde Oost Indische Compagnie (VOC). But Reader may be surprised to learn that VOC is the first company in the world to open the capital market. With large capital, the VOC had the ability to monopolize trade. This is one of the reasons why VOC became a very strong company in the economy.

How much is his wealth? Launching from Visual Capitalist, if equated with the current USD exchange rate, the wealth of the VOC reached $7.9 trillion or the equivalent of 112 trillion. Fantastic amount isn’t it? To achieve the same wealth, it is necessary to combine 20 large companies such as Microsoft, Apple, Exxonmobil, Alibaba, Amazon, Berkshire Hathaway, Samsung, Tencent, and so on.

The power of the VOC made trade competition in Europe more intense so that the VOC obtained permission to form its own military and political power. So it can be said that the VOC became a “country within a country”. However, due to massive corruption, the VOC went bankrupt and was closed by the Dutch Government. Because of that, there is an insinuation that the VOC is also referred to as Vergaan Onder Corruptie which means destroyed due to corruption.

As a company that opens the capital market in the world, the capital market in Indonesia has also been going on since the Dutch Government came to power in the colonial era. In 1912, the Netherlands officially opened a stock exchange branch in Batavia (Jakarta).

Types of Capital

1. Types of capital based on sources.

Based on the source, capital is divided into two, namely internal capital and external capital.

a. Internal Capital

Internal capital is capital derived from the wealth of company owners, shareholders’ capital, the sale of securities, or capital obtained from company profits.

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Examples of internal capital are vehicles, inventory, means of production, personal savings, buildings, shares, land, company profits, and so on that do not use external wealth.

b. External capital

External capital is capital obtained apart from the company’s wealth. The capital can be obtained from investors or creditors such as banks, cooperatives, personal loans.

Usually, external capital is required due to limited internal capital resources. Company managers are worried that internal capital will not be sufficient to carry out or develop business activities.

Examples of external capital are loans from banks/cooperatives, unpaid employee salaries, unpaid production costs to suppliers, investments deposited by investors.

2. Types of Capital Based on Ownership

Based on the owner, capital is divided into two, namely individual capital and social capital.

a. Private Capital

This type of capital is capital that comes from a person. The advantage of private equity is that it facilitates various business activities and provides optimal profit to the owner. Examples of this type of capital are personal property, deposits, and shares.

b. Social Capital

This type of capital is capital owned by the community. This capital provides benefits for the community in general in doing business activities. Examples of social capital are roads, ports, markets, bridges, stations, and others.

3. Types of Capital Based on Its Existence

If viewed from its nature, capital is divided into two types, namely active capital and passive capital. Here is an explanation of both.

a. Concrete Capital (Active)

Concrete capital or active capital is capital that can be seen with the naked eye and tangible. Examples of concrete capital are money, raw materials, buildings or places of business, vehicles, machines, warehouses, etc.

b. Abstract Capital (Passive)

Abstract capital is business capital that cannot be seen with the naked eye. Its value is difficult to measure directly. However, abstract capital is very important for the sustainability of the company.

Examples of abstract capital are knowledge, skills, copyright, brand, social media, business connections, managerial, and so on. Concrete capital and abstract capital are both needed to develop and expand a company.

Both should go hand in hand. Because to start business operations, Reader must have knowledge first. Reader also needs funds to start production. To make and market products, Reader needs the right supplier and customer connections. To develop managerial skills, Reader needs to upgrade their knowledge and skills. Thus, both are equally important.

4. Types of Capital Based on Their Properties

Based on its nature, capital is divided into two types, namely fixed capital and current capital. Come on Reader, let’s learn what fixed capital and current capital are.

a. Fixed Capital

Fixed capital or fixed capital is capital that can be used for production several times in the long term and repeatedly. Examples of fixed capital are buildings, machines, land, computers, vehicles, test equipment, etc.

b. Liquid Capital

Current capital or variable capital is capital that is used up in one production process. Examples of current capital are raw materials, fuel, disposable tools, and so on.

Capital Benefit

1. Prepare raw materials.

Before doing the production process, Reader definitely needs raw materials. Procurement of raw materials requires capital.

2. Doing the production process.

To carry out the production process, of course we need costs such as water to wash materials, soap, fuel, electricity, gas, and so on.

3. Manage business permits.

Having a business license is essential for a business unit. Especially if you want to cooperate with external parties and in large numbers. In managing business permits, Reader needs to prepare capital because it sometimes requires the services of a notary.

4. Manage patent rights.

Some of Reader works in business activities may be unique and prone to be recognized as the property of other companies. So Reader needs to manage the patent rights so that the product is registered in your name. Managing patent rights also requires capital.

5. Paying employee salaries.

Due to the many activities in running the business, Reader needs the help of others. You need capital to be able to fulfill employee rights with a salary that is in accordance with the agreement between your company and the employee. In addition, allowances, insurance, overtime pay also need to be recorded.

6. Savings.

A good company is a company that has a savings account as a reserve fund. This savings can also serve as capital in a desperate situation.

7. Increase the trust of other parties.

The existence of capital can increase the trust of your prospective partner. Some prospective partners consider the financial condition of the company they will work with. This is not surprising because to make sure that the company that will work together is not playing around.

8. Other requirements.

Other requirements that require capital are to open new branches, expand markets, transportation, pulses, company inventory, and other company needs.