Capital is the money used to build, run, or grow a business. It can also refer to the net worth (or book value) of a business.
Capital most commonly refers to the money used by a business either to meet upcoming expenses, or to invest in new assets and projects.
To learn instead about the net worth of a business, see book value.
Why capital matters
You have to put money into a business in order to get a profit back out. Capital is what we call the money that goes in.
A business needs to have enough capital to meet all its upcoming expenses. This is called working capital. If it doesn't have enough working capital, it will default on bill payments and may have to stop trading.
Most businesses like to have more than enough working capital. The extra capital can be invested in improvements that might help grow the business.
See related terms
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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.