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Understanding Owner’s Equity

by Olufisayo
Published: Last Updated on
Antrix Corporate Solutions Ltd
Owner's equity

Equity or owner’s contribution means the private money you put into your business. If your business fails you will lose that money.

The owner’s equity is called risk capital because you as the owner risk your money on the business. Even though equity is a risk for you, investing your own money in the business makes the business less risky. This is because capital from equity will put less pressure on the business than borrowing money.

There is less pressure because you do not have to make a repayment or pay interest on fixed dates like you have to do if you borrow money.

Whatever form of business you start, you will have to invest some of your own money. For example, a limited company has a share capital, which is money that comes from the owners.

To reduce the risk in your new business, it is good to have some money to invest in it as owner’s equity. If you have savings to invest in the business but still hesitate to do so, that might be a sign of your doubts about your business idea. You should then go back and evaluate your business ideas again to make sure that you really believe in them enough to risk your own money in the business.

Within personal finance, money used to purchase shares put in a collective investment scheme or use to buy any asset where there is an element of capital risk is deemed as an investment.

This distinction is important as the investment risk can cause a capital loss when an investment is realized, unlike cash saving(s) for example, many deposit accounts are labeled investment accounts by banks for marketing purposes.

If it is cash then it is savings, if it is a type of asset which can fluctuate in normal value then it is an investment. It addresses the ways in which individuals or families obtain budgets, save and spend monetary resources over time, taking into account various financial risks and future life events.

If you want to save money to start your own business, you have two options;

Option A. You can try to work on the new venture while you are still at your current job.

Option B. Save enough money so that you can quit your job and focus on your new company full time. Beyond saving for a new business, there are other options, such as borrowing.

Depending on your situation, this former might be a better option than the latter.
Much of the economic activities of a country are based on decisions made in the private sector of the economy.

There is a circular flow of money spent by consumers and business firms in one direction (output market) and a corresponding flow of goods and services from resource owners and business firms (input market) in the opposite direction.

The flows show how the input market and the output market are joined together to coordinate and determine how resources are used in a basically private enterprise economy. Wealth is made available to all when resources are processed into goods and services and successfully sold in the markets.

Most of the capital goods, commercial and social services, as well as the technological know-how required to satisfy our needs, come from business activities, i.e. through economic development of privately owned resources.

Photo by olia danilevich from Pexels

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