CHAPTER ONE:
SOCIAL CAPITAL, WHAT IS IT?
When we think of the word ”capital”, most of us associate it with money. Capital, however, is much more than the financial angle of a business we tend to couple it with. The dictionary will provide you with a host of different meanings for the word. In business, the term capital can mean three different things. These three meanings come from the different areas of a business, i.e., finance, human resources, and public relations. Let’s look at all of these in turn.
FINANCIAL CAPITAL
Finance is considered the lifeblood of a business. Financial capital is a resource that is measured in terms of money and is used by entrepreneurs to make and sell their products or provide their services to their customers. Anything that can be expressed in monetary terms can be accounted for as financial capital. This form of capital can also include machinery, tools, factory, and land used to operate the business. It is almost impossible to start and run an enterprise without money, and this is true for most businesses in the world. The amount of money required by a business might vary in accordance with its nature: for example, setting up a manufacturing unit is more capital intensive when compared to establishing a corner shop on your street or starting a baking business from home. The stage at which you will require the funds may be different for different types of businesses. For instance, a talent-based business will require more money for marketing, a service business will not require much money at the start, and a fashion label will require money at all stages from setting up shop to producing the inventory to distribution and marketing. The source of the capital might also vary from business to business and entrepreneur to entrepreneur. There are so many different ways in which the money required for a business can be raised. The source of funds can be broadly categorized as internal or external. Internal funding comes from the entrepreneur themselves. You might have enough savings to start your business, you might choose to borrow funds from your friends and family members, or you might decide to sell an asset or a valuable personal belonging. Whatever the manner, the entrepreneur makes their own arrangements by making use of their inner circle.
The second option is adopted by those entrepreneurs who require a sum of money that is too large to be collected through internal sources. Some business owners also choose to adopt the external method of raising funds when all of their efforts with the internal method have been unsuccessful. As the name suggests, this method involves approaching people and organizations outside one’s inner circle for investment. One option is to go to a bank for a loan. Many banks out there have funding programs for new entrepreneurs as well as mature enterprises. Approaching high-net-worth individuals, venture capitalists, or angel investors is another very popular way of securing funding for a business. While banks primarily only provide the capital required for the business, this second category of people and organizations can help entrepreneurs in the day-to-day functioning of the business and provide advice when required aside from buying a piece of the organization through their financial contribution. Both of these above-discussed methods of securing external funding can help an entrepreneur to raise any amount of money and are popularly used in the corporate world, but some business owners find these methods complicated and time-consuming because of the stringent formalities and paperwork associated with them.
Putting it all together, the amount raised by an entrepreneur for his venture could either be debt or equity. When the person or organization providing the capital is offered a share in the ownership of the business, such capital is called equity capital. Funds brought on board through friends and family members, personal savings, and angel investors are some examples of equity capital. Money raised in this way isn’t a loan and doesn’t have to be returned. A certain rate of return, say 5% of the sum contributed, is paid to the owners of the capital annually in the form of a dividend. This, however, isn’t mandatory and is at the discretion of the entrepreneur. Those holding ownership in a business by way of their financial contribution are free to sell their stake to someone else if they wish to recover their dues. Debt capital, on the other hand, is a borrowed sum of money that has to be repaid to its owner. A bank loan is a classic example of debt capital. Sometimes, family members and other people contributing money in their personal capacity might also opt to do so in the form of debt instead of equity. Debt capital does not dilute the ownership of the business allowing the entrepreneur to have complete control. The person or organization contributing money in the form of debt is not entitled to any proportional share in the ownership of the business. Such financiers are compensated by way of periodic interest payments. Debt capital is much riskier than equity capital, and those businesses that are unable to repay their creditors may even have to file for bankruptcy.
When people use the word ”capital,” they almost always are exclusively referring to ”financial capital.” Broadly speaking, capital is actually a resource. It is a means to create value and profits for a business. While it cannot be denied that money is essential to carry out business activities and eventually generate revenue for an organization, can a high-tech office building, a massive piece of land, or a bank account full of money start, run, and grow a business on its own? Never in a million years. Even the most novel business idea in the world can get nowhere without the involvement of a human brain. Financial capital is definitely important for a business but it most certainly isn’t the only ingredient for success. Financial capital only has value when it is in the hands of a human being, and this brings us to the second kind of capital without which no business activity is possible.
HUMAN CAPITAL
This is an invaluable intangible asset that cannot be listed on the balance sheet of a company but is crucial for its existence, growth, and success. Human capital refers to the economic value of a worker’s experience and skills (Kenton 2022). It includes assets such as employee education and training, intelligence, experience, all kinds of management skills and other employee attributes, loyalty, punctuality, and other qualities that employers value. It is an investment of a company in its employees.
An organization is considered only as good as the people working in it. It is people who run and grow an organization. Every person working at a company is a mix of different qualities and characteristics. All of these varied personalities come together to shape the personality of an organization. While it’s true that the personality of the person in the top seat has a greater influence on an organization, every single employee has a role to play. The concept of human capital advocates that no worker is equal, but the quality of employees can be improved by investing in them. So what does it mean to invest in human capital?
Simply put, an investment in human capital for a business owner would entail conducting employee training and development programs. This can include sponsoring the higher education of employees, designing workshops to help employees improve their skills such as managing time, coping with stress in the workplace, dealing with difficult work situations and clients, and working in teams both large and small. The employee training and development program of some businesses also includes career planning for their staff. Specialized sessions are also held to teach employees different methods and techniques to improve their efficiency and performance in their jobs. They are given lessons to help sharpen and enhance their problem-solving skills, communication skills, technical skills, creativity, resilience, emotional intelligence, and mental health. On several occasions, the workforce of a business comprises people from different religious, geographical, and cultural backgrounds. To ensure a productive and harmonious work environment, providing such employees with adequate training sessions and lectures on teamwork is crucial for a business. This is especially true for large and growing companies, and for those businesses that are located in cosmopolitan cities.
We all know PepsiCo Inc, the Fortune 500 megacorporation headquartered in the US that makes snacks and beverages. Like most other large companies in the world, this one too has its own human resource management (HRM) policies in place to build its human capital. At PepsiCo, the belief is that people are their greatest assets. Its HR department focuses on people development, and in order to do that, systems are put in place to encourage employees to work to their full potential. A collaborative and mutually supportive work environment is created at all their offices around the globe to encourage people to grow and flourish. Performance management and reward systems are developed to motivate the workforce to keep working hard. Thorough training is provided to all employees right at the start of their employment. Employees are provided with leadership development sessions, career development planning programs, and one on one sessions with qualified professionals to solve their problems. Steps are taken to ensure the overall well-being of all employees and to provide them with direction in life. Relationship building is the key focus of the human resource...