Equity-capital: Financial Definitions
November 2nd, 2009
Copyright © 2009 Integrated Profitability TM
The second in a series based on a request to cover “capital”:
“Good! Finally all of this is coming together for me. How about more on capital? What is it? where does it come from, is it actual & stored somewhere physically and separately or virtual like the net or sum of two or more numbers?”
The last article, Capital: An Introduction, painted a high-level picture of the arena in which one finds capital. To put some meat on those bare-bones, here are definitions for the main concepts—in a kind of reverse order:
● Revenue: money that comes into a business. This represents the value of what customers are paying for products and services provided by your business; a.k.a.: income.
● Expense: money that goes out of a business, particularly funds spent to make, deliver and support products and services purchased by customers; a.k.a.: cost.
● Net-Profit: what is leftover from revenue after all expenses are paid. “Net-profit” is merely a mathematical equation and depending on the two inputs, it can be positive (a good thing) or negative (not such a good thing).
● Income Statement: the summary statement that contains revenue and expense, and ends with the difference between the two (revenue minus expense). Net-Profit is either positive or negative. There may not be consensus on what the former is called, but the latter is universally known as “a loss.” Which is why the Income Statement is also known as The Profit and Loss Statement.
● Assets: what you own.
● Liabilities: what you owe.
● Capital: the difference between what you own and what you owe. Like with Net-Profit, this is a mathematical calculation. If Assets are greater than Liabilities, the company has positive capital. If, however, a company’s effort and investment haven’t worked out, Assets may be lower than Liabilities which leaves the company with negative capital.
● Balance Sheet: a summary statement that contains all of a company’s assets, liabilities and capital. In the wonderful world of T-accounts, double-entry bookkeeping, journals and ledgers, Assets are shown on the left half of a page (Note: as you are looking at it; not from the page’s perspective) while the Liabilities and Capital are on the right half of the page. The convention is that Liabilities are always on top—possibly in homage to the fact that if a company goes into a death spiral and splats into bankruptcy, the people holding Liabilities get paid before those holding Capital.
With perfect timing, The Contra Costa Times this morning (November 2, 2009), had an article covering the bankruptcy filing for the CIT Group (Morning Report; “Key Lender files for Chapter 11”; page AA1). Two pertinent points related to capital:
“…, CIT’s bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion.”
“Treasury Department spokesman Andrew Williams said the government will be closely monitoring the bankruptcy proceedings, but acknowledged that “recovery to preferred and common equity holders will be minimal.””
Apparently, good and bad news are twins.
Please let me know if there are other terms for which definitions would be beneficial, or helpful, or add clarity.
Next in the series: The Market & Other Names for Capital
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 44
Telephone: 925-202-6244
Copyright © 2009 Integrated Profitability TM
Equity-capital: An Introduction
October 26th, 2009
Copyright © 2009 Integrated Profitability TM
The “Small Business Finance & Profitability” (SBF&P) blog has received a request to cover “capital”:
“Good! Finally all of this is coming together for me. How about more on capital? What is it? where does it come from, is it actual & stored somewhere physically and separately or virtual like the net or sum of two or more numbers?”
“Capital” is a great topic and one the SBF&P blog hasn’t touched upon. Not even gotten close, although passing reference has been made to it from time to time. Capital is a critically important part of a company’s financial books. However, it can be somewhat esoteric; which means, it will take a few blogs to define, explain and clarify what capital is, why it is important and how it can be used.
This first article will be an introduction, providing a definitional foundation for more detailed articles in the future.
The prospect of a series of articles on financial capital will no doubt send some people screaming for any button on your keyboard that will return you to where you came from, close the browser or shut-down your computer. A pity.
To begin the discussion of capital, an introduction is in order. Of all the financial statements created to report on companies, two stand head-and-shoulders above the rest:
● The Income Statement
● The Balance Sheet
These may trigger big yawns for many, but do your best to stifle them. If these two reports don’t raise your heart rate, hang in there. Things get better. Trust me: I’m in finance.
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