You’ve heard the business lingo out there and you are finding yourself getting better with all of the definitions, theories and formulas of financing your business. One term that you may not completely understand is financial capital. So, what is financial capital, and what is its place in your business?

Financial Capital Is…

According to Wikipedia, financial capital, which is also described as economic capital, is “any liquid medium or merchandise that represents wealth or other styles of capital.” A financial instrument occurs when a contract is made with any type of capital asset. These instruments may be “served” as mediums of exchange, standards of deferred payments, units of an account, or stores of value.

Medium Exchanges

Medium exchanges are financial instruments used to enable the trade of goods, purchases or sales between individuals or companies. According to Investopedia, the medium of exchange is currency.

Standard of Deferred Payment

The standard of a deferred payment is the “accepted way” that a debt is settled. In times past, gold has held the standard, but in recent years United States’ dollars along with the Euro are also considered acceptable ways to settle a debt.

Unit of Account

A unit of account is a more abstract valuation of market value as opposed to a physical element such as cash or gold. For example, houses for sale in a market are priced using a unit of account. Units of account are meant to be stable in value. Still, units of account are subject to change. Inflation would make the price or worth of a unit of account rise, while deflation would cause the worth of a unit of account to fall.

Stores of Value

A store of value is a type of financial capital that must be able to be adequately saved, stored and is recoverable. Stores of value often include physical things such as real estate, gold, collectibles and livestock.

Conclusion

These are only four types of ways that financial capital is handled and exhibited. There is much more to learn when it comes to your business, but now you have a better understanding of your company’s capital.