Fixed Capital and Working Capital

Capital investment is required for a firm to function smoothly and efficiently. The money or wealth is needed to buy or equip assets that will let them make items or complete a service. The two types of capital necessary in their company venture are fixed capital and working capital. An entrepreneur can preserve a perfect balance between their assets and liabilities and strive toward earning more substantial revenue by using these two capitals.

What is Fixed Capital and how does it work ?

To put it another way, fixed capital refers to the cash used to acquire long-term assets or fixed assets. These fixed assets are the first and most important purchases a firm makes, and they are used to manufacture the final product on a continuing basis. These inexhaustible assets aren’t used or depleted in a single accounting period.

Fixed Capital Examples

Fixed capital consists of tangible and durable assets that are necessary for production and are used for a long time. Fixed capital includes items such as machinery, vehicles, and equipment, as well as plants, buildings, and other structures.

What is the definition of Working Capital ?

Working capital is the difference between current assets and current liabilities, and it represents the approximate money accessible to the firm. The assets that a corporation holds that can be liquefied within a year are referred to as current assets. The overdue payments that a corporation must make in the coming financial year are known as current obligations.

Current assets include inventories, cash on hand, debtors, and so on, whereas current liabilities include short-term loans, bank overdrafts, creditors, tax provisions, and so on.

As a result, one distinction between fixed capital and working capital is that working capital is utilised to fund an organization’s short-term business activities.

Fixed Capital vs. Working Capital: What’s the Difference?

On the basis of the following elements, the distinction between fixed and working capital may be clearly identified:

• The part of an organization’s total capital that is invested in long-term assets is known as fixed capital. Working capital is the money needed to run a business on a daily basis.
• Fixed capital investments are durable products that will stay in the firm for longer than one accounting period. The company’s working capital, on the other hand, is made up of short-term assets and liabilities.
• Fixed capital is generally illiquid since it cannot be quickly converted to cash. Working capital investments, on the other hand, may be converted into cash quickly.
• Fixed capital is used to acquire non-current assets for the firm, whereas working capital is used for short-term finance.
• The entity’s strategic objectives, which include long-term business planning, are supported by fixed capital. Working capital, on the other hand, is used for a variety of purposes.

Conclusion

Capital is the primary necessity of all business organisations in order to operate. After analysing the reasons raised above, it is evident that fixed capital and working capital, collectively known as total capital. They are not inherently conflicting, but they complement each other in the sense that working capital is required to utilise the fixed assets of the firm, i.e., there is no use of equipment and machinery if raw materials are not employed for production. As a result, working capital guarantees that the company’s fixed assets are used profitably.