What is fixed capital?

Fixed capital consists of land, buildings, plant, machinery, fixtures or any other property that is permanently committed to the business. (Example for the last item is the regular working capital). These assets are not fixed in the sense of their value but fixed in the sense that they are committed to the business for a long period of time and difficult to be converted into cash in a short period. Fixed capital is usually highly specialised and if the business does not earn the minimum required rate of profits, these assets cannot be disposed of except at a loss. The fixed asset is needed to carry on the profitable operations over a long period of time.

However, the cost of fixed assets varies from concern to concern depending upon (i) nature of business, (ii) type of manufacturing (simple process or complicated round-about process) (iii) the size of business unit, and (iv) the mode of acquiring the fixed assets. As regards the nature of business activities, marketing enterprises require a small amount of fixed capital as compared to industrial concerns in general. Public utilities and capital goods industry require much greater amount of fixed capital than what is  needed in consumers’ goods industries. Enterprises like railways, tramways, or electricity companies have to be started at their full size in the very beginning, and hence the cost of fixed assets becomes comparatively larger. On the other hand most of the consumer goods industries can be started on a modest scale and expended gradually for reaching their full growth. The size of the business is an obvious determinant of the amount of fixed capital.

As regards the mode of acquiring assets they can be purchased outright or on the basis of instalment payments. Particularly valuable machines can be acquired on instalment basis. Some other assets like land and building can be acquired in many cases on the basis of lease agreements. Moreover, in many concerns tools and equipments are manufactured by the companies themselves for meeting their own requirements. These different considerations will affect the amount of fixed capital.

To be on a safe side and prevent possible interruption in the flow of business operations, fixed capital needs must be properly assessed and financed. These needs must be financed from permanent sources of finance such as issue of shares, debentures and long term investments. If fixed capital needs are financed with short term finance, it may interrupt the business activities and the rate of return because short term debts fall due very soon and possibly the firm might be running short of funds at that time. Obviously, failure on the part of the management may lead banks to stop granting or renewing credit facilities to the firm.

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