Corporations are faced with two main tasks: to maintain daily operations and to grow the enterprise by acquiring facilities, equipment, intellectual property and other companies. Money comes into the company in the form of sales revenues, capital investment through issuance of stock and borrowed capital through bank loans and issuance of bonds. The money used to support daily activities is called working capital, or cash; the money used for acquisition of assets for the purpose of growing the company is called capital investment.
Think about working capital as current assets minus current liabilities. In other words, revenues and accounts receivable minus accounts payable leaves you with a certain amount of cash that goes toward buying inventory, paying rent, paying utilities and paying the workers, among other things. It is used to pay short-term obligations. It is the life-blood of the company, and if it falls short of needs, the company must borrow to make up for the shortfall.
A key task in corporate management is the management of the company's cash or working capital. Maintaining enough cash flow to meet the bills is one reason for the annual budgeting activities performed by a company. The cash manager must know how much money will be paid out and when so he can manage the cash to meet those obligations and foresee shortfalls in time to alert management to cut costs, increase sales or borrow short-term funds. Cash managers invest working capital of a company in short-term money market investments.
The goal of capital investment is to provide benefits to a company over the long term. While working capital expenditures are subtracted from income to obtain net income, capital investment expenditures are spread out in equal amounts over a long-term period and subtracted from earnings as depreciation in the case of physical assets such as buildings, and amortization in the case of a patent or trademark.
Making a capital investment is a major undertaking for a company. It can be in the form of a strategic move to gain market share through acquiring a competitor. It can be an improvement in production capacity through the purchase of new equipment, or it can be research and development of new technology. In any case, it is generally a large investment that, if properly planned, will benefit the company. If not properly planned, it can destroy the company. Generally, investment capital is raised through issuing stock or long-term bonds.
- Food and Agriculture Organization of the United Nations: Investment Decisions -- Capital Budgeting
- New York University, Stern School of Business: Discussion Issues and Derivations
- WorkingCapital.org: Working Capital Needs
- U.S. Securities & Exchange Commission. "Form 10-K, Exxon Mobile Corporation ," Page 68. Accessed March 13, 2020.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.