AMB Performance Group Blog

How Does Capital Investment Lead to Economic Growth

Posted on: July 29, 2021
Business Growth

Whether your business is capital intensive or you don’t need a great deal of money to maintain your company, at some point, capital investment is a must for every company.

Some believe capital investing is the path toward better financial growth. Others believe it simply takes away from a company’s financial growth because it may impact the end-of-year financial statement.

What’s the truth of capital investment and the economic growth of your company? It begins with an understanding of capital investment itself.

Toward a Definition

Capital investments are just those that involve the purchase of fixed assets. Perhaps you bought some land for your company.

Maybe you invested in a new building. It could be that you upgraded the machinery your company needs to run. Whether you used cash, other assets, or a loan to make that purchase, it’s considered a capital investment, and without it, many businesses could never even get started.

It’s important to note here that capital investment is any funds you invest in the business to purchase fixed assets. It is not the funds you invest to cover your daily operating expenses.

Whether these funds go to get the assets necessary to expand, take advantage of new technology, or replace assets is irrelevant. What really matters here is that the purchase is a fixed asset.

Some businesses are fairly capital-intensive. Those that require new machinery on a regular basis – like construction companies, for example, tend to need additional capital investments on a regular basis. Others, though, don’t require a big investment. Consulting companies, finance-based companies, and virtual businesses, for example, tend not to need facilities or equipment on a regular basis.

How Does Capital Investing Promote Financial Growth

The idea of capital investment is an important one in our economy and for the businesses themselves. It’s one major measure of the overall health of the economy.

As businesses make more capital investments, they send a clear signal that they’re feeling confident about the future. The less confident business owners feel the more likely a recession is to occur.

In the greater economy, growth occurs when the production of goods and services increases. Consumers spend more, added trade happens, and the economy as a whole is working as it should be.

For example, if companies are spending more on capital investments to expand the products and services they offer, they tend to hire more employees. That leads to an overall increase in salaries and wages, which leads to more consumer spending, which eventually leads to economic growth.

This is typically measured by gross domestic product (GDP) – the value of all of the finished goods and services in the country. The government’s GDP estimates come out on a quarterly and an annual basis, and it’s a broad measure of the economic health of the country and how that’s changing.

Within the company itself, though, capital investment tends to spur economic growth. Without capital investment, innovation simply can’t happen.

Tangible assets like new facilities, new tools, and new machinery mean you can increase the production of whatever it is that you sell. That helps to further your business objectives, and that means more customers. Eventually, those investments translate to better revenue numbers.

Making Capital Investments In Your Company

Understanding the idea behind capital investments, though, and actually making them help spur economic growth in your company are two very different things.

Making capital investments means gaining access to capital, which can be a frustrating process for some companies. How can you find funding sources for your company? There are four different places many small businesses turn when they’re ready to make those investments.

  1. Personal Assets: Your savings account, the investment account you already have, and even the equity you’ve built in your home are all excellent ways to raise the capital you need. Typically to make this work, you’ll create a personal loan to your company, then pay yourself back over time.
  2. Financial Institutions: Most banks have small business programs to help with capital investments. These are usually loans, but there are a number of loans tailored specifically toward this type of purchase.
  3. Crowdfunding: This is a fairly new way to fund capital investments, but they’re a growing resource for popular products. This is a kind of stock offering that is incredibly complicated, but there are resources out there that can help you raise funds to make the necessary investments in your company.
  4. Professional Investors: Some call these venture capitalists or angel investors, but they can be a good way to raise quite a bit of money so you can make the necessary capital investments in your company. Be careful, though, as these kinds of investors will do whatever it takes to protect the profits involved.

Is It Time to Make a Capital Investment In Your Company?

Not sure whether you need to make a capital investment to ensure solid economic growth well into the next few years?

It may be time to meet with a business coach to better understand what capital investments are most likely to help you grow your company.

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