Financial Capital vs. Economic Capital: What's the Difference? (2024)

FAQs

Financial Capital vs. Economic Capital: What's the Difference? ›

Financial capital is the monetary assets required for a business to provide goods and services. Economic capital is commonly calculated through risk management strategies and determines the capital required to cushion a business from losses.

Financial capital has been subcategorized by some academics as economic or "productive capital" necessary for operations, signaling capital which signals a company's financial strength to shareholders, and regulatory capital which fulfills capital requirements.

While finance in a lot of ways can be defined by the direct use and management of money, economics considers both material and non-material resources and how the scarcity of resources can impact local or global markets, goods and services, and human behaviour.

Financial capital refers to a company's cash, credit, or other funding purchasing power. Two principal sources of financial capital are debt and equity; retained earnings can also be considered a part of it.

Economic capital is the amount of capital that a company needs to survive any risks that it takes. It's essentially a way of measuring risk. Financial services companies calculate economic capital internally. Economic capital should not be confused with regulatory capital (also known as a capital requirement).

Economic or financial capital entails monetary funds and investments like equity, debt, or real estate. Human capital and social capital augment the purely economic rationale behind capital and together better explain how business and economic growth really work.

The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions. Any debt capital is offset by a debt liability on the balance sheet.

As a general social science, the focus of economics is more on the big picture, or general questions about human behavior around the allocation of real resources. The focus of finance is more on the techniques and tools of managing money.

The earning potential and salaries are comparable between the finance and economics fields. While the professions are related to one another, they're also very diverse, and salary can range based on the type and level of the job. As candidates gain more experience, they can typically negotiate for higher salaries.

A finance degree might be more suitable if you are interested in managing investments, financial planning, or business finance. An economics degree might be more appropriate if you are engaged in economic research, policy analysis, or public service. Ultimately, the decision is yours.

What are the two basic types of financial capital? ›

Debt and equity finance

Debt and equity are the two main types of finance available to businesses.

Mumbai, often referred to as the “Financial Capital of India,” is a bustling metropolis that stands as the economic heartbeat of the nation.

Capital employed is calculated by taking total assets from the balance sheet and subtracting current liabilities, which are short-term financial obligations.

Typically, economic capital is calculated by determining the amount of capital that the firm needs to ensure that its realistic balance sheet stays solvent over a certain time period with a pre-specified probability. Therefore, economic capital is often calculated as value at risk.

Many people use both terms interchangeably, but they are in fact different. Whereas financial investments are bought with the intent of making money, economic investments are purchased to improve the productivity of a company and ultimately raise its profit margins and stock value.

Capital is a broad term for anything that gives its owner value or advantage, like a factory and its equipment, intellectual property like patents, or a company's or person's financial assets. Even though money itself can be called capital, the word is usually used to describe money used to make things or invest.

It has been argued that the productive capacity of a company or country is given by real capital such as land, buildings, machines, and knowledge to produce goods. In contrast to such real capital is financial capital such as stocks or bonds.

The term 'capital assets' which is sometimes used in business accounting includes Fixed Assets, but it has a wider meaning, and includes other assets, such as Natural Resources. Sometimes Fixed Assets are referred to as 'real assets', to distinguish them from Financial Assets (such as deposits or shares).

Capital Structure is a combination of different types of long-term sources of funds. Financial Structure is a combination of different types of long-term as well as short-term sources of funds. The Capital Structure is a part of the Liabilities section of the Balance Sheet.