In the modern money using economy, finance may be crudely defined as making provision of money when it is required. Finance being the lifeblood of any business, it has become the most important factor of production.

To start any industry, it is necessary to have enough finance in India, there is no adequate capital to finance our industries. One of the reasons for slow industrial progress in our country is the paucity of capital resources.

Nature of capital

Capital can be defined as “Wealth which yields income or helps in the production of further income”. No industry can be set up without capital and without capital, there cannot be any economic development in the country.

CAPITAL HELPS IN FOLLOWING WAYS

·        It helps in buying factors of production.
·        It enables to buy machinery, tools, implements buildings for factories and raw material etc.
·        It helps to pay wages to the labour force employed.

Accumulation of capital depends upon the community’s capacity to save and to invest the savings in productive purposes. Generally banking institutions perform the function of collecting savings and channelising these savings through the capital market in the form of capital for productive purposes. Capital formation can be stated to be the process of building up a stock of capital out of the country’s resources.

Organisers need capital for establishing a new industry or for expanding the existing industry. There are two types of capital :
·        Fixed capital
·        Working capital


Fixed capital

The capital required for establishing an organisation is called as fixed capital. A company should be properly capitalised and that the actual capital should be neither more nor less than the amount which is needed and which can be properly utilised. It is necessary for a new concern to accurately estimate the requirements of funds.

The examples of fixed capital are the capital invested in the factory buildings, machinery, plants, furniture, patents and tools etc. This means that fixed capital is invested in which assets which cannot be easily converted into money.

SOURCES OF FIXED CAPITAL ARE AS FOLLOWS

·        Share of Equities.
·        Preference Shares (Cumulative, Non-Cumulative).
·        Deferred Shares.
·        Public Deposits.
·        Debentures.

Working capital (circulating capital)

Working capital which is also termed as circulating capital is the capital required for running an organisation. The funds needed for purchasing raw materials, paying the labour force and for meeting day-to-day requirements are called as Working Capital.

Working capital can be defined as the capital invested in the working or current assests like stock of raw material, semi-finished or finished products and receivable bills etc. The working capital is invested, recovered and re-invested repeatedly during the life time of the concern. The requirements of working capital can be met with short term funds.

The major sources for obtaining working capital are the commercial banks. 

They provide finance in the form of :

·        Loans
·        Credit facilities
·        Overdrafts
·        Mortgages
·        Bill of exchange
·        Public loans (Loans directly invited from the public)

Authorised Capital

Every company has to specify the amount of capital it wants to register. This is required to be mentioned in the Memorandum of association of the company. This capital is called as authorised capital. The company can raise only this much amount through public subscription. However, there is no upper limit imposed by law on this capital.

Issue and Un-issued capital

A company may not collect the whole authorised capital at a time. It may raise it gradually as and when it is actually required. The total amount shall not, however, exceed figure of authorised capital. This issued capital is the amount which is open to the public for subscription. Unissued capital is the balance of nominal capital to be issued.



Subscribed capital

The issued capital is the capital which company wants to raise from the public. But the public may not subscribe the whole amount. The subscribed capital is the amount which the public is willing to subscribe, the balance is called as unsubscribed capital.

Called up capital

The company may not be in a position to use all the subscribed capital at a time, so the company demands only a part of each share to be paid and the rest of the amounts at some later date. The amount on the share which is actually demanded by the company to be paid is known as called up capital.

Paid up capital

It is the actual amount paid by the members against called up capital. The amount in balance which is still to be paid is called as unpaid capital.

Reserve capital


Reserve capital is a special category of capital created by the company. It is part of the subscribed capital which is yet to be called up. It is part of uncalled capital.