Fixed and Working Capital: All You Need to Know

Capital is a broad phrase that can refer to anything that provides value or advantage to its owners, such as a factory and its machinery, intellectual property such as patents, or a company’s or individual’s financial assets. While money can be seen as capital, capital is more commonly linked with cash that is put to work for productive or investment objectives. There are a few factors determining fixed and working capital, which we will study in this article. In general, capital is an essential component of running a firm daily and financing its future expansion. Business capital might come from the company’s activities or debt or equity funding.

What is Working Capital? 

The networking capital (NWC) of a corporation measures its liquidity, operational efficiency, and short-term financial health. If a firm has a significant positive NWC, it should invest and grow. If a company’s current assets do not surpass its current liabilities, it may struggle to grow or repay creditors. It may even declare bankruptcy.

Working capital, even in some cases known as net working capital (NWC), is the difference between a company’s current assets (cash, accounts receivable/unpaid bills from customers, and raw material and finished goods inventories) and current liabilities (accounts payable and loans). To fully grasp your working capital requirements, you may need to map your company’s monthly inflows and outflows. For example, a landscaping firm may discover its revenues peak in the spring. Cash flow remains pretty stable through October before plummeting virtually to nothing in the late fall and winter. On the other hand, the company may have various costs that persist throughout the year.

What is Fixed Capital? 

Fixed assets are long-term physical assets utilized by businesses to generate profits. Because fixed assets have a useful life of more than one year, they offer the company a long-term financial advantage. Fixed assets, often known as capital assets, are signified on the balance sheet by Property, Plant, and Equipment. Fixed assets are not readily convertible into cash. 

Fixed capital refers to the amount of a company’s total capital outlay that is spent in physical assets such as factories, vehicles, and machinery that are kept in the company for an extended length of time, or, to put it another way, for more than one accounting period. Fixed assets can be purchased and owned by a company or leased for a long period of time.

The opposite side of the capital equation circulates or is consumed by a corporation during the manufacturing process. This covers raw supplies, labour, operational costs, and other costs. Marx stressed the relative nature of the distinction between fixed and circulating capital, which refers to the comparative turnover periods of various forms of physical capital assets.

Fixed capital also “circulates,” but the turnover period is much greater since a fixed asset may be retained for several years or decades before yielding its value and being dumped for its salvage value. A fixed asset can be resold and utilized at any time before its useful life expires, as is frequently the case with automobiles and aeroplanes.

Financial professionals utilize information such as fixed assets and depreciation when determining if a business is a lucrative or non-profitable venture. When choosing the profitability of fixed investment, the plan of action for depreciation must be considered.

Fixed Asset Types

Intangible Assets: An intangible asset does not have a physical presence. Intangible assets include brand recognition, intellectual property, goodwill, and intellectual property such as copyrights, trademarks, and patents.

Tangible Assets: A real asset exists in the physical world. Examples of tangible assets include land, buildings, and machinery.

Difference between working and fixed capital 

Conclusion

In this article, we understood the concept of fixed and working capital. A tangible asset, such as a building, or an intangible asset, such as intellectual property, can be used to fund a fixed capital expenditure. Fixed capital investment excludes more ephemeral resources such as staff and inventory requirements. Working capital is the use of financial resources in day-to-day business activities. Investing in working capital entails the acquisition of short-term assets and the incurring of short-term obligations. A company’s balance sheet reports its fixed capital investment and working capital investment operations. Understanding the concept of fixed and working capital gives one a clear sense of business accounting and helps them understand the building blocks of Capital Investment.