What is Fixed Capital: Types and Importance

What is Fixed Capital: Types and Importance

5 mins read1.7K Views Comment
clickHere
Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Sep 21, 2023 01:07 IST

Fixed capital is a portion of total capital outlay invested into fixed assets that remain permanently within the business for at least one period of accounting. The circulation of this type of capital is for a longer period of time.

2023_03_MicrosoftTeams-image-172.jpg

In this article on what is fixed capital, we will be discussing the types and importance of this type of capital.

Table of Contents

What is Fixed Capital?

Fixed capital in accounting is a real and physical assets used repeatedly in producing products. In economics, it refers to a type of capital good that is used as a means of production which is durable. It includes assets and capital investments that are required for start up and conduct business from a minimal age. 

Such assets are considered fixed in a way that these are not consumed or destroyed during actual good or service production having reusable value. Such capital investments are typically depreciated on the accounting statements of the company over a long time period. 

It is the portion of total capital outlay of business invested in physical asset that stay permanently in business for more than one accounting period. Fixed assets are purchased and owned by business or can e structured as a long-term lease.

Explore accounting courses

Requirement

For any business to run smoothly, this type of capital is required while varying from industry to industry. Some of the businesses require large amount of fixed-capital assets. Procuring this type of capital is a lengthy process even if production businesses have easier access to inventory required for crating goods. 

Through fixed capital, businesses can efficiently produce goods and services effectively. It also helps businesses and organization in staying in the competition within the marketplace. By investing in modern fixed assets, businesses can produce goods and services at a lower cost to increase profitability. 

Explore investing courses

Factors Impacting the Requirement for Fixed Capital

The following factors impact the requirement for fixed capital:

  1. Scale of the business: This factor is directly proportional with the scale of the business. The larger is the size of your business and its operation, the higher is the requirement for fixed capital. Similarly, if the business is on a small scale, then the requirement for fixed capital is also lesser.
  2. Growth expectation: As the company starts working and planning growth objectives, the requirement for capital also grows. This is due to the fact that companies need assets for increasing production and running operations smoothly.
  3. Collaboration: When a company collaborates with another company, the requirement for capital also increases. In case the company operates completely on its own, also has higher capital requirements.
  4. Production technique: The requirement for fixed capital also depends on the production technique being employed. If the is capital intensive then the requirement for capital will be more in comparison with a company that uses labour-extensive techniques. 

Importance

The following points highlight the importance of fixed capital:

  • Starting a business: To start a business, a company needs capital since without capital. No business can be initiated without capital since inventory and material are required for starting the business. Land, inventory and raw material can be all purchased through fixed capital.
  • Modernising a company: For modernising a company, requirements are there to improve the infrastructure of a company. To improve the efficiency of the system, it is important to bring invest in technology.
  • Promoting a company: After the establishment of the company, the promoters require capital to pay for their promotional expenses. These expenses cover the cost incurred on payment of establishment expenses, project report preparation, professional fees and issuance of company prospectus.
  • Expansion: It helps in expanding and diversifying company. When the company wants to grow in the same sector, then it requires capital for expansion and when the business wants to grow into further sectors, it requires capital for diversification.  
  • To stay in competition: When the company wants to stay in the competition, then it needs capital for marketing and promotional activities. 

Types of Fixed Capital

Since this capital includes those assets that generate revenue over an extended time period, these are not liquid and cannot be converted into cash easily. Following are the different types of fixed capital:

  1. Land: It is one of the largest fixed capital since it can be utilized for numerous requirements. Land can be used for starting a factory, office space or storage purpose. Its value increases with time. 
  2. Equipment: This is a type of fixed capital which is used for the production of goods and services. Tools, machines, vehicles are some of the equipment that are the part of fixed capital. 
  3. Building: Just like land, buildings are also important capital since they are multipurpose in nature. These can be used for storage, office space or even manufacturing facilities. 
  4. Intellectual property: These include trademarks, copyrights and other intangible assets that are used for generating revenue for a business. Such assets can be licensed or sold to other companies due to which they offer a competitive advantage to the company.
  5. Infrastructure: These are the physical systems that are required for the smooth operation of a business. These include bridges, utilities, roads as well as telecommunication networks. 
  6. Natural resources: These include oil, gases and minerals that are essential for the production process. 

FAQs

How is Fixed Capital Different from Working Capital?

While fixed capital is invested in long-term assets, working capital is used for financing the day-to-day operations of a business. Working capital indicates the difference between a company's current assets and current liabilities.

Why is Fixed Capital Important?

Fixed capital is crucial for a business as it helps in creating a base for production and operations. It enables a company to acquire the necessary assets to produce goods and services, thereby generating revenue in the long run.

How is Fixed Capital Financed?

Fixed capital can be financed through various means such as equity, loans, retained earnings, or issuing bonds. The choice of financing depends on the company's financial strategy and the nature of the assets being acquired.

Can Fixed Capital be Depreciated?

Yes, fixed capital assets like machinery and buildings can be depreciated over time. Depreciation allows a company to spread the cost of an asset over its useful life, providing a way to account for the wear and tear of the asset.

What are the Components of Fixed Capital?

Fixed capital can comprise various components, including tangible assets such as physical assets like machinery, buildings, and land; intangible assets such as non-physical assets like patents, trademarks, and copyrights.

How is Fixed Capital Managed?

Managing fixed capital involves making strategic decisions regarding the acquisition, utilization, and maintenance of long-term assets. It includes planning for the replacement of assets, budgeting for capital expenditures, and ensuring optimal utilization of the assets.

About the Author
author-image
Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio