FIXED VS WORKING CAPITAL

Today, I will try to explain the difference between FIXED AND WORKING CAPITAL.

First, let’s define them and learn their meaning.

Every company requires funds to invest in its assests whether long term assets or short term ones.

A fixed asset is the one which remains in firm for more than one year like plant or machines. In this context FIXED CAPITAL refers to investment in long term assets.

In similar manner, WORKING CAPITAL refers to investment in current assets, which lasts less than one year. example- cash in hand, debtors etc.

MANAGEMENT OF FIXED CAPITAL:-

Management of fixed capital means to safely invest the fixed capital into long term assets or projects so that it will lead to profit. These decisions are very important because fixed capital need to be invested such that profit is maximized and loss minimized.

A good management of fixed capital will lead to various benefits:

1) It will lead to long term growth and will increase the firm’s ability to perform better in long run.

2) All decisions related to investment are taken after a large analysis of returns, therefore it increases the analytical ability of our personnel.

3) Also it tries to improve a firm’s ability to tackle risk as long term investments involve some factor of risks.

MANAGEMENT OF WORKING CAPITAL:-

Similar to fixed capital, management of working capital is also very necessary as it means investing in those assets or projects whose full utilisation can be done in less than one year.

If we manage working capital properly then we will have a large amount in return and it will be a benefit for coming years. It focuses on meeting current liabilities that are to be repaid in current financial year.

Now, after benefits we will see the factors affecting the requirement of fixed and working capital:-

1) The type of business has a lot to do with capital. For say- a trading co. needs lower fixed and working capital than a manufacturing firm.

2) The size of business, a firm operating on large scale needs more space, machinery and cash to operate as compared to a small firm.

3) Choice of techniques, if we consider a capital intensive firm then it needs more cash  to operate as compared to a labour intensive co.

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