The Basics of Capital Investment
As capital investment refers to the total money a business has put towards the purchase of assets in order to grow and prosper, capital investment refers to the money a business invests in order to acquire new assets, expand into new markets or run an ongoing business. It is the process of making investments in order to raise funds to support growth or run an ongoing business. Capital constitutes the difference between total assets and current assets. It can also be defined as the income that represents the difference between total assets and current assets less any net worth disbursed for the business. The concept of capital can be very confusing and some companies confuse the idea of capital with tangible assets.
Capital for businesses therefore refers to the difference between total assets – which represents the cost of production of the plant and raw materials – and current assets – which represents the revenue collected from sales of products and services. To invest in capital also means to assign cash to a business with the objective of either creating a profit or to achieve an expansion or growth in the cash flow so that it can invest the cash in different assets. In other words, to make capital investment, means to either create new income streams from new sales of products and services or to achieve an expansion in current production capacity. Capital also refers to the difference between tangible assets and intangible assets. Examples of tangible assets are inventories, fixed assets, goodwill, and licenses.
When a company makes an initial investment and makes no direct or indirect return on this capital, it is called unaerodynamic capital. Capital investment can either be short or long term, but in most cases it is short term in nature as the capital is required to only expand the existing productive capacity of the company. Long term capital investments on the other hand, are usually required to make a direct return on the company’s invested funds. In most cases, a financial institution may make direct investments as part of its overall portfolio; however, there are some banks that make equity investments based on the company’s capital structure; and others may choose to purchase retained earnings from the companies they already do business with. A financial institution may also decide to reinvest dividends paid by the company into additional assets.