Difference Between Fixed Capital And Working Capital

Difference between fixed capital and working capital

The main difference between fixed capital and working capital is, fixed capital is the capital that has been present in the fixed assets and has been permanently blocked in the business whereas working capital is the capital that has been spent for the requirements of the company in day to day life. An example of fixed capital is the plant machinery of the company and an example of working capital is to capital required for purchasing goods, paying salary to the employees. To differentiate between fixed capital and working capital we have to know more about fixed capital and working capital. So let’s discuss more fixed capital and working capital in detail.

What is fixed capital?

Fixed capital is the capital that has been present in the fixed assets and has permanently block in the business. It means has fixed capital which has present in the business but it doesn’t present in cash. It can be in the form of plant machinery or something that is fixed in the business. We can understand fixed capital more easily by taking an example. So let’s take an example of fixed capital to understand it.

There is a company which has big machinery parts and which has used for manufacturing goods. And it manufacturer goods at a large scale for sale in the market. So here the big machinery parts of the company are the fixed capital of the company.

These big machinery parts of the company don’t present in cash but if the company wants then the company can convert these big machinery to cash after selling the goods. This fixed capital has present with a capital no matter the company is getting profit or loss. This capital will remain the same, there will be no impact on this fixed capital of the business.

Requirements of fixed capital

The requirements for fixed capital depend upon the nature of the company means how big the company is or what goods the company manufacture. All these things decide the fixed capital for a business or company. If we take an example to understand it then, there is a company who manufacture clothes.

So the requirements of fixed capital will be for the plant machinery which has been used to manufacture clothes. And if there is a company that manufacturer sanitary. The required fixed capital for the sanitary company will be the plant machinery that has use for manufacturing taps, pipes, etc.

But the fixed capital for both sanitary and clothing companies won’t be the same. It has depended on the nature of the company. The fixed capital can be more for the clothes company as compare to the sanitary company. And it’s also possible that the fixed capital for the sanitary company can be more than the clothes company. This will consider how big the company is.

If the sanitary company will be bigger than the clothes company then the required fixed capital for the sanitary company will be more than the clothes company. And if the clothes company will be bigger than the sanitary company then the required fixed capital of the clothes company will be more than the sanitary company. It’s totally dependent upon the company that how much goods companies are manufacturing or how big the company is.

Factors affecting fixed capital

Nature of business

• There is a manufacturing company then high fixed capital will be required. Because in manufacturing company machinery for manufacturing goods will be required to install which will require more capital. And also many other things which will require more capital like paying salary to the employees who are working in the company, capital required for purchasing goods and many more. And this will result in high fixed capital.

• In case if nature of the company is trading then it will require less fixed capital. Because here no need to install any machines or invest any other capital. Because of a trading company, here only selling products to retailers have priority to the company.

Size and scope of business

• If the company is big means it manufacturers goods at a large scale then it will require more capital and the result will be, it should have high fixed capital.

• If the size of the company is small which manufactures goods at a small scale then the capital requires will be less. And because of small company required fixed capital will be less.

Lease or purchase assets

• If any company purchase any goods or any service then they have to spend high fixed capital.

• But if any company take services at least then they will have to keep less fixed capital.

Arrangement of sub-contract

• In any company, if the whole things are performed by the single company or performed by own then high fixed capital will be required.

• But if the company make a sub-contract with another company then low fixed capital will be required.

Choices of techniques

• In the case of a company invest more money as compared to labour. This means a company use more machines as compare to labour to perform their works then high fixed capital will be required.

• If the company uses more labour instead of more capital then low fixed capital will be required.

Trends in economy

• If the company is getting more profit then this is obvious that the company will want to earn more profit. And for that, the company will invest more capital in their business. Because the company investing more capital so high fixed capital will be required.

• If the company is not getting more profit means at the time of recession the company will invest less capital so less fixed capital will be required.

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Population trends

• If the population is more in any country then the requirements of goods will be more and if the demand will be more then the company will invest more capital to manufacture more goods. And for that high fixed capital will be required.

• And if the population will be less then the demand of the company will be less. So the company will invest less money, so less fixed capital will be required.

Consumer preferences

• If the consumer demands more goods then the company will have to manufacture more goods. To manufacture more goods high fixed capital will be required.

• If the demand for the goods is less then the company will manufacture fewer goods and because of fewer goods manufacturing less fixed capital will be required.

Competitive factors

• There has always a competition between the companies. So if the competitor is investing more capital then the company will also invest more capital. So high fixed capital will be required for that.

• If the competitor is investing less capital then the company will also invest less capital. So less fixed capital will be required.

What is working capital?

Working capital is the capital that a company invest for the requirements of a company in day to day life. It means it is a regular spending capital. If we understand working capital with an example then, let there is a company. The company use to purchase goods at a large scale and also some employees work in that company.

So to purchase goods the company needs money to give the seller of goods and the company needs to pay salary to the employees who are working in the capital. For all these things company needs capital. And the capital used in these things is working capital. So from this example, we can conclude that working capital is a capital which uses in day to day life.

Components of working capital

1. Current assets

Current assets are those assets that convert into cash within a year, those assets are known as current assets

2. Current liabilities

Current liabilities are those liabilities that set off or mature in a year, those liabilities are known as current liabilities.

Kind of working capital

1. On the basis of concepts

(I) Gross working capital- The sum of all the current assets are known as gross working capital.

(II) Net working capital- The difference between current assets and current liabilities are known as net working capital.

2. On the basis of time

(I) Permanent working capital- Those working capital that has life and the working capital doesn’t exceed one year & some of the parts of the investment is permanent.

(II) Fluctuating working capital- Those working capital that has fluctuating time period is known as fluctuating working capital.

Factors affecting working capital

• If the company is big then the required working capital will be more and if the company is small then the required working capital will be less.

• In seasonal time the required working capital has more as compared to normal time.

• If the company use to manufacture goods at a large scale then the required working capital will be more and if the company use to manufacture goods at a small scale then the required working capital will be less.

• If the company uses new technologies and for that, it needs to have high working capital.

Comparison 

• Fixed capital is that capital in which the capital has present in fixed assets and has permanently blocked in the business whereas working capital is those capital spent in day to day life for the requirements of the company.

• Working capital is in cash whereas fixed capital is not.

• Examples of fixed capital are plant machinery and example of working capital are capital required to purchase goods, paying salary to the employees, etc.

• Fixed capital doesn’t affect the profit or loss of the company whereas working capital affects.

These are the main difference between fixed capital and working capital where fixed capital is present in fixed assets of the company and working capital is that capital which use in day to day life for the requirements of the company.

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