Fixed and Working capital

Fixed and Working capital

Fixed capital-

Fixed capital refers to long term funds needed for the acquisition of those assets that are used over long period of time.

Or

Fixed capital refers to the amount which is invested in fixed assets of the business enterprise.

Or

Fixed capital refers to that portion of capital which is invested in fixed assets  such as Land ,Building, Plant and Machinery, Furniture, Factory, Vehicles, Fixtures & Fitting etc. 

Fixed  capital is used to acquisition of fixed assets which are to be used repeatedly over a long period of time.

Fixed  capital is used again and again to generate revenue for the business enterprise.

Fixed capital raised from the long term sources of finance.

Fixed capital is also known as block capital.

Fixed  capital is needed for setting up a new business enterprise. 

Fixed  capital is needed for modernisation ,expansion  and diversification of an existing enterprise. 

Factor affecting Fixed capital Requirement-

1.Nature of Business ( Trading business And  Manufacturing Business)

2. Nature of Product(Consumer Goods And Capital Goods)

3. Scale of operations(Large scale business or small scale business)

4. Type of Manufacturing Process (Services and assembly Industries/ Manufacturing Industries)

5. Modernization of plant(Requirement of Modernization of plant)

6. Degree of automation or Type of technique( Automatic plants / Labour intensive techniques)

7. Diversification(Single line Product/ Various Product)

8. Mode of acquiring Assets (Cash/Instalment Payment system/Lease )

9.Collaboration for using assets jointly

10. Channels  of distribution

ALSO READ : Management and its characteristics

Fixed and Working capital

Working Capital-

Working Capital refers to the capital required for day to day operations or working of an  Business organisation.

Working Capital is that part of the capital of a business enterprise which is invested in current assets.

Working Capital helps day-to-day Operations of the business.

Working capital consists of cash receipts from sales which are used to cover the cost of operation.

Working capital provide liquidity to the business.

Working capital is also called circulating or revolving  capital because it keeps circulating Or revolving in the business.

Working capital is needed for purchase of raw material, spare part, loose tools etc.

Working capital is needed for pay wages and compensation to staff.

Working capital is needed to the day to day expenses like fuel, power, water, rent, taxes, advertisement ,carriage.

Generally  the difference between the  current assets and current liabilities is called the working capital.

Types of Working capital –

1.Gross working capital

2.Net working capital.

1.Gross working capital – Investment in all the current assets is called Gross Working Capital.

2.Net working capital – The excess of current assets over current liabilities is called Net Working Capital.

Networking Capital =Current Assets – Current Liabilities

Current assets- Current assets are those assets, which can be converted into cash or cash equivalents within a period of one year. such as  cash in hand, cash at bank, marketable securities, Debtors, Bills receivable, Stock of raw material, Stock of finished goods, Stock of work in  progress,  cash for meeting current expenses such as  payment of wages, salaries, rent, advertisement expenses etc.

Current Liabilities-Current Liabilities are obligations or debts that are payable within a period of one year. For Example: Creditors, Bill Payable, Bank overdraft, Outstanding Expenses , Income received in advance, cash credit  etc.

Working Capital Cycle- Working Capital cycle is the time period between acquisition of raw material (payment to creditors) and and convert them into finished goods and the receipts of cash through  cash sales or collection from debtors and bills receivable.

Factor affecting Working capital Requirement-

1.Nature of Business ( Trading business And  Manufacturing Business)

2.Turnover of working capital

3.Scale of Operation

4.The volume of trading

5. Business Cycle

6.Seasonality of Production

7.Terms of customers credits

8.Inflation

9.Stock Holding

10.Credit availability from input suppliers

11.The nature and intensity of competition

12.The Time factor

13.Operating expenses

ALSO READ : Business Environment: Meaning, Features and Importance

Difference between Fixed Capital  and Working Capital

1 thought on “Fixed and Working capital”

  1. It’s been a nice experience to study with this 24*7 available content ,
    Feels like sir you are besides me to explain each point …..

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