What Is a Capital Resource?

lamontak590623/iStock/GettyImages

If you run your own business, there will be days when it feels like all you do is sign checks and hand over your hard-earned money. Though it all feels the same when it's coming out of your pocket, there are some important distinctions between those payouts. The supplies you use to make your product are just another operating expense, like utilities and taxes. But the money you invest in capital resources – the assets your company needs in order to function – represents the core of your business.

What Is a Capital Resource?

The short answer is that any asset you use in your business that's not paid for out of your operating revenues is a capital resource, or noncurrent asset. If you've had to dip into your company's line of credit to make acquire an asset or seek out another round of financing from banks or investors, it's likely the asset is a capital resource. Another test is whether the asset is something you'll use up and dispose of within a year or two, or whether you'll use it for the longer term. If you use it and depreciate it over time, it's probably a capital resource.

Examples of Capital Resources

Businesses with any physical presence usually have a number of capital resources. If you own your own building, for example, that's a capital resource. If you operate an earth moving company, your excavators and dump trucks are capital resources. If you're a web hosting provider, the servers in your data center – assuming you don't simply rent cloud space – are a capital resource. If you manufacture furniture, your woodworking tools and computer numerical control (CNC) equipment are capital resources.

Capital resources are things you use in your business, but they are not generally things you use up. If you run excavators, for example, the excavators themselves would be capital resources, but replacement tires or tracks would not. In a woodworking or furniture-making business, while the machines themselves are capital resources, saw blades and router bits are consumable items. Lumber would be another consumable and accounted for as part of your cost of goods sold. On the other hand, if you bought your own mill, the mill would be a capital resource. So would a woodlot, if you bought one or secured a long-term lease to its rights as a means of controlling your own lumber supply.

How to Save Money on Capital Resources

By definition, capital resources are some of the most significant investments your company will make. Saving money on them is worth your time and attention because few companies, especially at the startup stage, have all the capital they'll ever need. Purchasing equipment used or refurbished whenever possible is always a good idea, as long as the equipment is innately durable. Restaurant equipment famously falls into this category, and so do many pieces of manufacturing equipment. Vehicles and heavy equipment can be purchased when newly off-lease, just like your personal car, at a welcome reduction from the original price.

In the longer term, a capital resource may also offer the prospect of reducing operating costs. For example, trading up to more energy-efficient machinery or an easier-to-heat building can sharply reduce utility bills. Controlling your own supply chain, a concept called vertical integration, means that all the profit you'd pay to middlemen now stays within your own company. If you harvest your own logs and mill your own lumber, for example, you'll have an advantage over companies that have to buy their materials.

References

About the Author

Fred Decker learned business fundamentals at second hand as an insurance and mutual funds broker, and at firsthand as a retail store manager and the chef/proprietor of his own restaurants. He has written hundreds of business-related articles for sites including Zacks.com, Chron.com, Vitamix.com, Bizfluent and GoBankingRates and many others. He was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.