Question
Explain the meaning of ‘Fixed Capital’. Explain briefly the factors determining the amount of fixed capital.
Or
Explain in brief any five factors which affect the requirement of fixed capital of an enterprise.
Solution
Fixed Capital: It refers to that capital which is used for the purchase of fixed assets, such as land, building, machinery, furniture, etc.
Amount of fixed capital depends upon the following factors:
- Nature of Business: The requirement of fixed capital depends on the nature of the business. Manufacturing business requires the heavy amount of fixed capital to invest in the fixed assets like- Land&Building, Plant and Machinery, Furniture etc, whereas trading concern business requires less capital.
- Scale of Operations: Business operating on a larger scale requires a larger amount of fixed capital as they need heavy and bigger machinery and equipment. However, firms operating at small scale need relatively lesser fixed capital.
- Choice of Technique: Those manufacturing enterprises which make use of modern and automatic machines need a large amount of fixed capital. On the other hand, those enterprises in which production is carried out mainly through laborer, need for fixed capital is very little.
- Technology Upgradation: There are some businesses where a fixed asset is used and which does require immediate change. These days computer technology is undergoing rapid changes. Therefore, those companies whose business is computer-based need more fixed capital.
- Growth Prospects: There are two types of organizations from the point of view of growth: (a) Organisations, which have no possibility of growth. They do not need additional fixed capital in future. (b) Organisations which have more possibilities of growth. They need more additional fixed capital.
- Diversification: Diversification means running a business in more products than merely in one product. Those organizations which wish to adopt diversification certainly need more fixed capital.
