Every business needs capital to establish, maintain, operate and do business. So what is the source of capital ? Where can businesses mobilize capital? What factors affect a business's capital? Let's find out more details with 1C Vietnam in the content below.

1. What is the source of capital?

Capital resources on the balance sheet are resources that a company can use to generate revenue and profits. Capital includes all the assets a business owns, including cash, equipment, property, and inventory. In addition, capital also includes other amounts of money that the company borrows from shareholders, investors, banks or creditors.

2. What are the capital sources? Classification of capital sources

Based on the definition of what capital is , capital can be easily distinguished into two sources: equity and liabilities. Specifically:

• Owner's capital: This capital is not a debt and the business does not have to make payments. Depending on the business's operating model, equity includes 3 types:
  • Contributed capital: Is the amount of money initially contributed by the owner to establish the company and is often supplemented during operation.
  • Undistributed profits: Are undistributed profits used for any activity of the unit and are considered equity.
  • Other equity: Funds formed mainly from the distribution of profits, including: Development investment funds, bonus and welfare funds, financial reserve funds, exchange rate differences, resources construction investment capital,....

• Liabilities: Are loans or capital appropriated from other organizations and individuals, and the enterprise is obligated to make payments. Based on the payment term, debts can be divided into:
  • Short-term debt: Debts with a term of less than 1 year or 1 business cycle.
  • Long-term debt: Debts with a term of more than 1 year or 1 business cycle.

Below is a table that specifically classifies the capital sources of businesses into two main groups: equity and liabilities:

3. Current methods of mobilizing capital

Nowadays, businesses need to mobilize capital in cases such as launching new products, expanding scale, changing business fields, etc. Below are some popular capital mobilization methods today. :

3.1. Initial contributed capital

To be able to establish a business, the owner, investor or founder must spend a certain amount of capital to make the business legally qualified. This capital amount will be determined based on the provisions of law on business establishment. This source of capital has the advantage of not depending on external factors, but the disadvantage is that it is often limited, only accounting for about 20% - 30% of the entire enterprise's capital.

3.2. Capital mobilized from undivided profits

When a business retains a portion of its profits for reinvestment (without distributing dividends), shareholders will have increased equity ownership instead of dividends. This form has the advantage of having a great impact on the internal capital of the business, creating opportunities for higher profits in the following years. However, if businesses do not use this capital effectively, it will cause conflicts of interest between shareholders and managers, which can reduce the attractiveness of shares.

3.3. Mobilize capital from issuing shares

This is a form of large capital mobilization that helps businesses expand and develop quickly, carry out large-scale projects as well as increase their ability to borrow capital. With this method, businesses do not have to pay principal nor are they required to pay dividends if they do not make a profit (because dividends are calculated based on after-tax profits).

3.4. Mobilize capital from bank credit

Capital from bank credit is always considered an important source not only for the development of individual businesses but also for the entire national economy. Besides, interest on loans from banks is a business expense and helps reduce a portion of income tax, so compared to other capital sources, mobilizing bank credit is considered the most optimal method.

4. Factors affecting enterprise capital structure

Issues related to capital sources and financial capacity of businesses are always sensitive issues, influenced by many external factors. Therefore, businesses must not only understand what capital is and how to mobilize capital, but also firmly grasp the influencing factors to better control and use capital. Factors are divided into two groups: internal factors and external factors. Specifically:

1 - Factors inside the business

• Size of the business

• Business risks
• Profitability
• Length of the product's production cycle
• Bankruptcy costs
• The relationship between business leaders and creditors
• Credibility coefficient
• Asset structure of the enterprise
• Growth
• Solvency
• Risk level of business leaders
• Right to control the business
• The relationship between business operators and owners
• Life cycle and development stage of a business

2 - Factors outside the business

• State economic policy: Monetary policy, Investment policy, Tax policy.
• Stages of economic development.
• Lender's perspective.
• Prospects of the capital market.
• The degree of openness and integration of the economy

5. Distinguish between capital and assets in the balance sheet

The balance sheet often contains two concepts: assets and capital. So what are assets and capital ? Analyze in detail with 1C Vietnam below:

• Assets are the specific state of capital, what the business has and exists.
• Capital is an abstract expression, indicating the scope of using or mobilizing assets of an enterprise.

Each type of asset will be formed from one or more capital sources. It can be understood that capital participates in the process of forming an asset.

At a certain time, the relationship between assets and capital is expressed by the formula below:

Total asset value = Total capital sources

Total asset value = Total equity + Liabilities

Owner's equity = Total value of assets - Liabilities

6. Manage capital effectively with 1C:Company Management software

With the development of technology today, there are many software products created to help businesses manage capital better. In particular, 1C:Company Management solution is effective software that helps businesses save time, resources as well as strictly control the business's capital. Specifically, the subsystems of 1C:Company Management allow businesses to:

• Set up multiple currencies at the same time with multiple cash funds and bank accounts
• Analyze and plan revenues and expenditures from time to time to control the implementation of financial obligations.
• Allows recording, analyzing and controlling cash flows and debts for customers and suppliers, in detail according to orders and contracts.
• Provides a smart visual reporting system that analyzes business results of the enterprise according to user permissions. Reports can be customized based on user preferences.
• Analyze the balance sheet based on data about the business's cash flow, income and expenses
• Track details of loans and credits and automatically calculate the amount of principal and interest that need to be paid by many methods (fixed principal payment, periodic interest, end-of-term interest, fixed stamp.

Above, 1C Vietnam has helped businesses better understand what capital is and effective methods of mobilizing and managing capital. Hopefully through this article, managers will have more useful knowledge. If you have any questions, please contact 1C Vietnam immediately for detailed advice.