What is a Capital Commitment?

A capital commitment generates many meanings depending on the context in which it is used. In accounting, capital commitment refers to the total amount of money that a company intends to spend for a specific time. It is the capital expenditure forecasted by a company to spend on its long-term assets such as buildings, facilities, and equipment. In the sale of stock, capital commitment refers to the number of securities a company has or is committed to putting up for sale.

How Does Capital Commitment Work?

In a blind pool fund, capital commitment describes the investments that capital investors commit to contributing to the pool as requested by the fund manager. In a limited partnership, the capital that the general partner can request from limited partners refers to capital commitment. Capital commitment refers to planned expenditure by organizations or businesses to settle regular operating expenses as well as future liability. Funds that are held for a particular purpose such as investment purpose, expansion of business settling future liabilities and others. The size and operation of a business will determine the amount that will be set aside as capital commitment. A capital commitment is not the same as an incidental expense otherwise called contingencies.

Risks with Capital Commitment

There are several risks associated with capital commitments with the major one being the burden it puts on the finances of a business, especially when it is not properly planned. Despite that capital commitments are funds not yet released by the company in most cases, they can mount pressure on the accounts of a company, especially if there is overcommitment or under-commitment on the part of the company. For instance, if a company under-commits, it means it might be unable to meet all future obligations and if it over-commits, a decrease in capital can have great impacts on the company. As a way of hedging these risks, the capital commitment of a company can be viewed or accessed when its financial statements are released.

Capital Commitment in the Stock Market

In the stock market, the shares of an organizations that the organization commits to put u for sale refer to capital commitments. Capital commitment refer to shares of a company that are available for sale in the current market. Capital commitment in the stock market pose a bit of risk because the value of the shares are connected with market conditions as market factors affect the shares.

Capital Commitment in Private Equity

In private equity, the amount of funds that a venture capital investor promises to contribute to a venture capital fund when the manager requests it is a capital commitment. Therefore, the commitment that an investor makes to fund an investment for a specific period is capital commitment. This commitment can also be to contribute to fees requested by the fund manager.