Fixed capital refers to the investment of the venture in long term assets of the business. Every business needs funds to finance its assets and activities. Fixed capital is a obligatory one-time investment made at the preliminary phase of a business establishment. Investment is necessary to be made in fixed assets and current assets. Fixed assets are those which remains in the business for more than one year, generally for much longer e.g., plant and machinery, furniture and fixture, land and building, vehicles etc.
Assessment to invest in fixed assets must be taken very cautiously as the investment is typically relatively large. Such decisions once taken are irrevocable except at a huge loss. Such decisions are called capital budgeting decisions. Current assets are those assets which, in the normal routine of the business, get converted into cash or cash equivalents within one year e.g., inventories, debtors, bills receivable etc.
Focal points of fixed capital
- Fixed capital is a compulsory initial investment made in the business.
- It helps to lay down the basic infrastructure on which business is supposed to stand and flourish in a long run.
- It is a part of total capital invested in the business.
- It has a permanent existence in the business to meet its long-term needs.
- It is used for purchasing fixed assets like land, building, plant, machinery, etc.