From the level of importance acquired by capital, understanding of its generation and accumulation process becomes of great relevance, mainly in relation to the capacity to generate wealth. According to Smith it is the amount of capital that the subject has that will outline his way of use. A visit to https://valuenetworksandcollaboration.com/evergreen-wealth-formula-review/ makes things perfect.
An individual whose income originates exclusively from his own work is called an employee and he is devoid of capital or any other natural wealth that can be sold. That is, for the wage earner, wealth is due to their ability to work for others.
According to Quadros (1991), in cases where the subject has capital in excess of what he needs to survive, for a considerable period of time, Smith defines two types of capital, namely:
- Subsistence capital: corresponds to the capital necessary for meet the basic needs of the individual.
- Capital: Refers to any monetary amount considered to be in excess of your subsistence needs and is aimed at generating income for you. It can also be identified as “investment capital”.
In addition to this classification, Smith also emphasizes that capital (aimed at generating income) is subdivided into Fixed Capital and Working Capital.
Understanding the two terms presented is simple. While fixed capital provides profit without changing owners, working capital generates profits only when it circulates, that is, when it changes owners. Examples of fixed capital include machines and instruments used in production and working capital can be represented by the money itself or products in stock.
However, it is necessary to emphasize that, according to Adam Smith, no fixed capital can generate income, except for working capital.
Thus, money is intended only for the circulation of capital. And on it, it is worth resuming the concepts of gross income and net income. Gross income means the total annual production of your land or work and the net income is the remainder of that production after deductions related to production maintenance expenses.
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Thus, the greatest global social objective is to increase your net income considerably and permanently.
Regarding the development of countries and their wealth, Smith states that there is a natural order related to capital investment, in which the investment of most of it is configured in agriculture. Second is manufacturing, and only last is it possible to visualize foreign trade.
The serious control of expenses and revenues through a well-structured cash flow helps to inhibit this practice that is so common among small and medium-sized entrepreneurs and, at the same time, so harmful to the sustainability of the enterprises. Experts recommend maintaining two separate checking accounts: one for you and one for your company.
Separate the Individual from the Legal Entity within you: each of these spheres has its rules and its own financial flow. A good tip is to look for banks that, in view of this difficulty faced by many entrepreneurs, have put the same manager to attend to your personal account and your corporate account. The accounts themselves are separate, but the service is done by the same specialist, who is ready to indicate the best investment opportunities in your personal and corporate life.
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