What is Fixed Capital?

Updated on November 14, 2024 , 2311 views

Capital or money invested in fixed assets is referred to as fixed capital. To put it another way, money that is invested in long-term assets is known as fixed capital. It includes assets and capital investments, such as property, plant, and equipment, that are required to establish and operate a firm at any level.

These assets have a reusable value and are not consumed or destroyed during the creation of a good or service. It refers to the portion of a business's total Capital Expenditures spent on physical assets that stay with the company for more than one Accounting Cycle, or more technically, forever.

Factors Influencing Fixed Capital Requirements

Nature of Business: Fixed capital requirements depend on the nature of business, like whether it is a trading business or Manufacturing business or focuses on services.
Size of Business: Whether the business is small-scale or large-scale. For large scale businesses, there will be high fixed capital requirements, and for small-scale comparatively low.
Stage of Business: The requirement for established business will be less, and that of new business will be high.

Difference Between Fixed Capital and Working Capital

In any business, both fixed and working capital plays a vital role. Fixed capital refers to the assets or investments that are required to establish and operate a firm, such as Real Estate or equipment. Working capital refers to the cash or other liquid assets that a company utilises to fund day-to-day activities such as payroll and bill payments. While both fixed and working capital is required for a successful firm, they are not the same thing.

Here is the difference between fixed capital and working capital for better understanding.

Basis	Fixed Capital	Working Capital
Meaning	It refers to the investment in long term assets for the production of goods or services	The gap between a company's current assets (what it has) and liabilities (what it owes) is known as working capital
liquidity	Not easily liquidated, but can be resold and reused	Highly liquidated
Represents	This figure represents your company’s long-term financial health as it relies on these assets and investments to operate and serve consumers	This figure represents your company's operational Efficiency, liquidity, and short-term financial health
Depreciation	Fixed-capital assets are often depreciated over a lengthy period of time on a company's financial accounts.	Not applicable
Example	Property, buildings, equipment, and tools that your company employs on a regular basis are all examples of fixed capital	Current assets such as cash and Cash Equivalents, inventory, accounts Receivables and Current Liabilities such as accounts payables, short term debts, payments and so on

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The Bottom Line

Capital investment is required for a firm to function smoothly and efficiently. Capital or money is necessary to acquire or equip assets that aid in the manufacturing of items or the completion of a service. The two types of capital necessary in their company venture are fixed capital and working capital. To preserve a perfect balance between assets and liabilities and strive toward creating more substantial revenue, you must use these two capitals effectively and efficiently.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.