Financial capital is the money and money-denominated claims a business raises from its owners and its lenders, or retains out of its own earnings, and then deploys to acquire assets and fund operations. It is the funding side of a business rather than the things the funding buys. A drawn line of credit, a term loan, a bond issue and the proceeds of issuing shares are all financial capital; the equipment bought with them is not.
Why the Word Financial Is on the Front
Capital on its own covers more than money, and the two other kinds that sit alongside financial capital are not pools of funds at all.
Physical capital is the productive assets the money buys. On the balance sheet caption list the SEC prescribes for the filings it governs, those sit on the asset side, where property, plant and equipment takes caption 13 and the asset half closes at caption 18, total assets (17 CFR 210.5-02). Financial capital sits on the other half of that same list.
Human capital is the workforce, and it is not an asset caption at all. A registrant describes it in narrative instead, and only to the extent it is material to an understanding of the business taken as a whole: a description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (SEC Regulation S-K, Item 101(c)(2)(ii)). People reach the statements as payroll cost, never as capital raised.
Where a US Firm Meets It
Two places, and both are reporting locations rather than a figure anyone computes.
The first is the claims half of the balance sheet. The captions that carry financial capital start at accounts and notes payable at caption 19, where amounts payable to banks for borrowings are stated separately from amounts payable to trade creditors, and run through bonds, mortgages and other long-term debt including capitalized leases at caption 22 to the share captions and other stockholders’ equity at caption 30 (17 CFR 210.5-02). Interleaved with them are obligations the business ran up rather than funding it raised, trade creditors inside that same caption 19 and deferred credits at caption 26 among them. Where the line between the debt captions and the equity captions gets drawn is worked through at capital structure, what the equity leg is measured as at owner’s equity and stockholder equity, and the share caption and the charter authorization sitting behind it at capital stock.
The second is the financing section of the cash flow statement, which is where capital raised and capital returned actually move in a period. Cash inflows from financing activities include proceeds from issuing equity instruments, and proceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing (FASB Accounting Standards Update 2016-14, ASC 230-10-45-14). The outflow half of the same section is where that capital goes back out, as distributions to owners, share repurchases and principal repayments.
What Financial Capital Is Not
Financial capital and economic capital are different objects, and the second is a risk measurement rather than a pool of funds. Economic capital can be defined as the methods or practices that allow banks to consistently assess risk and attribute capital to cover the economic effects of risk-taking activities, and it is often parameterised as an amount of capital that a bank needs to absorb unexpected losses over a certain time horizon at a given confidence level (Basel Committee on Banking Supervision, Range of practices and issues in economic capital frameworks, March 2009). One is what the business raised; the other is what a model says should be held against what could go wrong.
Financial capital is also not a capital asset. That phrase is a tax-character label on property, defined negatively by Internal Revenue Code Section 1221, which starts with everything the taxpayer owns and removes eight named classes (26 U.S.C. 1221). It settles whether a gain on disposition is capital or ordinary, and it says nothing about how the property was funded. Those excluded classes are worked through at capital assets.
Common Questions
A term loan from a bank, a drawn line of credit, a bond issue, and the cash a shareholder pays in for newly issued shares are all financial capital. So are retained earnings left in the business rather than distributed, since that is funding the owners chose not to take out. The delivery van bought with the loan is not; it stays on the asset side while the loan that paid for it sits opposite.
In finance the bare word usually means this same funding pool, so capital and financial capital are used interchangeably until a qualifier narrows them. The qualifier is what changes the meaning: working capital narrows it to the liquid slice, current assets minus current liabilities, at net working capital; cost of capital prices the pool once the debt and equity legs are blended into one rate; and a capital asset, as above, is a tax label on property rather than a source of funds.
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