Which Factors are affecting the Requirement of Fixed Capital?

Which Factors are affecting the Requirement of Fixed Capital?

Factors affecting the Requirement of Fixed Capital

The factors determining, affecting or influencing fixed capital requirements of a business are briefly given in the following points:

Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organization; since it does not require to purchase plant and machinery etc.

Scale of Operations: A larger organization operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organization.

Choice of Technique: Some organizations are capital intensive whereas others are labor intensive. A capital-intensive organization requires higher investment in plant and machinery as it relies less on manual labor. The requirement of fixed capital for such organizations would be higher.

Technology Upgradation: In certain industries, assets become obsolete sooner. Consequently, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases. For example, computers become obsolete faster and are replaced much sooner than say, furniture.

Growth Prospects: Higher growth of an organization generally requires higher investment in fixed assets. Even when such growth is expected, a business may choose to create higher capacity in order to meet the anticipated higher demand quicker.

Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increase e.g., a textile company is diversifying and starting a cement manufacturing plant.

Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it.