At the end of each production period, you need to know the final capital amount that will be used to run the business in the following period. So, how do you calculate final capital?
To find the final capital calculation, there’s a formula you can use. However, first, you need to know what components are needed to calculate it.
Find out everything here, OK!
Definition of Final Capital
As the name suggests, ending capital is the amount of funds you have successfully obtained or accumulated at the end of an accounting period. These funds will then be used as initial capital for the next business period.
So, if a business makes a profit, its initial capital balance will increase. Conversely, if the business makes a loss, its initial capital balance will decrease.
That is why ending capital is calculated at the end of the financial period because you must first know the profit and loss position before determining the amount of capital that can be used in the next period.
What are the Benefits of Calculating Final Capital?
There are several benefits that you will feel if you calculate the final capital in the correct way, namely as follows.
1. Get Accurate Financial Reports
By calculating your final capital, you’ll obtain more accurate financial reports, making it easier to analyze and evaluate your business.
2. See how smoothly the business is running
When you know the results of your final business capital calculations, you will know whether your business is running smoothly or not.
If the final capital increases, it means the business is making a profit and is running well. Conversely, if the capital decreases, it means the business is making a loss and is not running well.
If the final capital results show that the business is experiencing losses, it means you have to change your sales strategy and make improvements so that the final capital in the next period does not get the same results.
3. To Predict Business Continuity
After calculating your final capital correctly, you can then predict how your business will perform. Do you have enough capital for the next business period, or should you seek a loan?
That way, the business can run well and is expected to generate profits in the next period.
Also read: Easy and Complete Guide to Calculating Capital and Selling Price
What are the components of ending capital?
When calculating final capital, you need to know what components are included in the calculation. Here’s an explanation.
1. Initial Capital
This is the total capital used for production purposes before the business starts. Initial capital itself consists of a combination of three types of capital: working capital, investment capital, and operational capital.
What is working capital? It is the total cost used to purchase raw materials for production purposes.
Meanwhile, investment capital is the total cost required to purchase the main production equipment, which is the largest of all other capital expenditures. However, this is a one-time investment and can last for a long time.
Operating capital, on the other hand, is the cost required to meet the production process’s needs. It’s also incurred only once a year, for example, once a month, and continues to be incurred depending on capacity or production volume.
2. Profit or Loss
As the name suggests, profit is the gain earned from a business. To calculate it, find the difference between revenue and expenses. If the difference is above zero rupiah, that amount is your business’s profit.
A business is considered to be making a loss if its expenses exceed its income. Therefore, when the difference between revenue and expenses is below zero rupiah, it is considered a loss.
3. Prive
The final component of this final capital is the amount of withdrawals made as a business owner, whether for business or personal purposes. Therefore, these private withdrawals will be recorded as part of your remaining capital or finances.
Also read: The Meaning of Repeat Orders for Business and How to Create Them
How to Calculate Final Capital
Here’s how to calculate ending capital based on profit and loss balance.
1. Retained Earnings
The calculation of ending capital using retained earnings will typically be greater than or increase from the beginning capital. To calculate ending capital using retained earnings, use the following formula:
Final Capital = Initial Capital + (Profit – Prive)
2. Balance Sheet
In contrast to retained earnings, the calculation of ending capital with retained earnings will usually result in a decrease in the initial capital used. The calculation formula is as follows.
Final Capital = Initial Capital + (Loss + Private)
Example of How to Calculate Final Capital
A newly operating stationery business spends capital with the following details:
- Total investment capital = Rp. 35,000,000
- Total working capital = Rp. 400,000
- Total operating capital = Rp. 3,000,000
In a one-month period, the business earned a net profit of Rp. 3,000,000 and the business owner withdrew funds of Rp. 1,000,000.
How to calculate initial and final capital is:
Initial Capital = Investment Capital + Working Capital + Operational Capital
= Rp35.000.000 + Rp400.000 + Rp3.000.000
= Rp38.400.000
Final Capital = Initial Capital + Profit – Private
= Rp38.400.000 + Rp3.000.000 – Rp1.000.000
= Rp42.400.000
Because the final capital has increased from the initial capital, aka making a profit, it can be said that the stationery business being run has good prospects and performance.
That explains how to calculate your closing capital at the end of a period. If you’re having trouble managing your business’s financial reports, you can get help from the Labamu app.
There’s a comprehensive and easy-to-understand Reports feature here, giving you a deeper understanding of your business. There’s also an Accounts Payables feature to clearly record accounts payable and receivables without disrupting cash flow.
If you are interested in the Labamu application, download it directly from Google Play or the App Store, OK!
