What is Fixed Capital? State factors affecting requirement of Fixed Capital.

Answer: Fixed Capital and its Factors Affecting Requirement.
Meaning: 

Fixed capital is that portion of total capital which is invested in fixed assets such as, land, building, equipments, machinery etc. It may be held in business for 5, 10 or 20 years or more. Thereafter it may be sold or reused.‐ Investors invest their money in fixed capital hoping to make future profit.

The concept of “Fixed Capital” was first theoretically analyzed by economist David Recardo. In National Accounts, fixed asset is defined as “the stock of tangible, durable fixed assets owned or used by resident enterprises for more than one year. This includes building, plant, machinery, vehicle, equipment, etc.”

According to Karl Mark, “Fixed capital also circulates, except that the circulation time is much longer”. [It means that the fixed capital remains in business for a longer period of time. Whereas, investment in assets such as raw materials can be readily converted in cash] The European system of National and Regional Accounts includes intangible assets such as computer software, copyright, etc. within the definition of fixed assets.

Factors affecting Fixed Capital Requirement:

The factors affecting fixed capital requirement are as follows:

Nature of Business, Size of Business, Growth and Expansion, Stage of Development of Business And Business Cycle:

i. Nature of Business:
The nature of business plays a vital role in determining fixed capital requirement. For e.g. Rail, roads and other public utility services have large fixed investment. Their working capital requirements are nominal as they supply services and not products. They mainly deal in cash sales only. On the other hand, trading organizations like retailers require less of fixed capital as they do not need large funds for land, building, plants and machineries.

ii. Size of Business:
Bigger the business, higher is the need of fixed capital. Hence, the size of a firm, either in terms of its assets or sales affects the need of fixed capital.

iii. Growth and Expansion:
In order to manage growing production and turnover, a growing firm may need to invest more in fixed assets.
iv. Stage of Development of Business:
The requirement of fixed capital for a newly established organization is more than that of an established organization.
v. Business Cycle:
When there is a boom period in an economy, the organization invests more in fixed assets so as to increase its production capacity.

However, during recession, the organization avoids undertaking huge projects, and hence, it may not require more of fixed capital.

 

What is Capital Structure? What are the internal and external factors influencing Capital Structure?

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