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Factors Affecting the Fixed Capital

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The assets which remain in the business for a period of more than one year are known as Fixed Assets. For example, plant, machinery, building, land, furniture, equipment, etc. These assets are not meant for sale. Fixed Capital is the money invested by a company in its fixed assets, which are to be used over a long period of time. Hence, it can be said that fixed capital is used for meeting the permanent or long-term needs of the business. 

Fixed Capital

 

Factors Affecting Requirement of Fixed Capital

Fixed Capital refers to investment in fixed assets for a longer period. The fixed capital of an organisation gets its funds through long-term sources of finance like preference shares, equity shares, debentures, etc. The requirement of fixed capital in an organisation depends upon various factors. These factors are as follows:

1. Nature of Business

The first factor which helps in determining the requirement of fixed capital is the type of business in which the company is involved. A manufacturing company requires more fixed capital as compared to a trading company. It is because a trading company does not need plant, machinery, equipment, etc. 

2. Scale of Operation

The companies operating at a large scale require more fixed capital as compared to the companies operating at a small scale. It is because the former requires more machinery and other assets; however, the latter requires less machinery. 

3. Technique of Production

The companies that use capital-intensive techniques require more fixed capital; however, the companies that use labour-intensive techniques require less fixed capital. It is because the capital-intensive techniques use plant and machinery for which requires more fixed capital.

4. Growth Prospects

Companies aiming at expanding their business and having higher growth plans require more fixed capital for expansion of business. They have to expand their production capacity and to do so they need more plants and machinery. Hence, the companies aiming at expanding their business require more fixed capital.

5. Technology Upgradation

Industries, where technology upgradation is fast, requires more fixed capital, as whenever new technology is invented, the old machines become obsolete and the firm has to purchase new plant and machinery. However, the companies where technological upgradation is slow, need less fixed capital, as they can easily manage with old machines.

6. Diversification

The companies which are planning to diversify their activities by including more range of products require more fixed capital. It is because, for diversification of the business, they have to produce more products for which more plants and machinery are required, ultimately increasing the need for more fixed capital.

7. Level of Collaboration/Joint Ventures

The companies that prefer collaborations or joint ventures need less fixed capital as these companies can share plants and machinery with the collaborators. However, if a company prefers to operate its business as an independent unit, then it will require more fixed capital. 

8. Availability of Finance and Leasing Facility

If a company can easily arrange financial and leasing facilities, then it will require less fixed capital, as it can acquire the required assets in easy instalments and won’t have to pay a huge amount at one time. Whereas, if a company cannot find financial and leasing facilities easily, then it will require more fixed capital, as it has to purchase plants and machinery by paying a huge amount at once.

Name of the factor

Requirement for More Fixed Capital

Requirement for More Working Capital

Nature of BusinessManufacturing CompanyTrading Company
Scale of OperationLarge Scale OperationSmall Scale Operation
Technique of ProductionCapital Intensive TechniquesLabour Intensive Techniques
Technology UpgradationFast Technological UpgradationSlow Technological Upgradation
Growth ProspectsHigher Growth ProspectsLower Growth Prospects
DiversificationCompanies DiversifyingCompanies staying stable to one product/service
Availability of Finance and Leasing FacilityDifficulty in getting finance and leasing facilityEasy availability of finance and leasing facility
Level of CollaborationOperating independentCollaborating with other companies

Last Updated : 18 Jul, 2023
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