Fixed capital requirements: In order to start the business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures. This is known as the fixed capital requirements of the enterprise. The funds required in fixed assets remain invested in the business for a long period of time.
Different business units need a varying amount of fixed capital depending on various factors such as the nature of the business, etc. A trading concern, for example, may require a small amount of fixed capital as compared to a manufacturing concern. Likewise, the need for fixed capital investment would be greater for a large enterprise, as compared to that of a small enterprise.
Fixed capital involves the allocation of a firm’s capital to long-term assets or projects. Managing fixed capital is related to the investment decision and it is also called Capital Budgeting. The capital budgeting decision affects the growth and profitability of the company.
Factors Affecting Requirement of Fixed Capital:
- Nature of Busines
The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as a trading company does not need plants, machinery, etc.
- Scale of Operation
The companies which are operating on a large scale require more fixed capital as they need more machinery and other assets whereas small-scale enterprises need less amount of fixed capital.
- Technique of Production
Companies using capital-intensive techniques require more fixed capital whereas companies using labor-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and the company needs more fixed capital to buy plants and machinery.
- Technology Up-gradation
Industries in which technology up-gradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery whereas companies where technological up-gradation is slow they require less fixed capital as they can manage with old machines.
- Growth Prospects
Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital.
- Availability of Finance and Leasing Facility
If companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets in easy installments instead of paying a huge amount at one time.
- Level of Collaboration/Joint Ventures
If companies are preferring collaborations, joint venture then companies will need less fixed capital as they can share plant and machinery with their collaborators but if the company prefers to operate as an independent unit then there is more requirement of fixed capital.
Companies that have plans to diversify their activities by including more range of products require more fixed capital to produce more products they require more plants and machinery which means more fixed capital.