Capital Requirements of a Company — Fixed Capital

4. Capital Requirements of a Company — Fixed Capital

Two kinds of capital requirement. Once a company has decided to raise funds (the financing decision) and decided broadly where to invest them (the investment decision), its total capital requirement splits naturally into two categories, based on how long the funds stay tied up: fixed capital and working capital (examined in the next section).

Meaning of Fixed Capital. Fixed capital refers to the funds a company invests in acquiring fixed assets — assets that are used in the business over a long period to generate income, rather than being bought and sold in the ordinary course of business. Fixed capital is raised once, mainly at the time the company is formed or when it undertakes a major expansion, and it remains invested (blocked) in the business for a long period, typically the whole useful life of the asset it finances.

Examples of fixed assets financed by fixed capital: land and buildings, plant and machinery, furniture and fixtures, vehicles, and intangible assets such as patents and goodwill acquired for use in the business.

A working definition. Fixed capital is that part of a company's total capital which is invested in fixed assets and is required for the purpose of establishing and equipping the business with the physical means of production — it is raised for a long period and is not meant to be converted back into cash during the normal course of business.

Factors affecting the requirement for fixed capital:

1. Nature of the business. A manufacturing company (needing heavy plant and machinery, factory buildings) requires far more fixed capital than a trading or service company, which may operate with comparatively little fixed investment.
2. Size and scale of operations. A company planning large-scale production needs proportionately larger factory premises and machinery, and therefore a larger fixed-capital investment, than a small-scale unit.
3. Choice of technology. A capital-intensive method of production (heavily automated, machine-driven) requires much more fixed capital than a labour-intensive method that relies more on manual labour and less on machinery.
4. Method of acquiring fixed assets. A company that buys land, buildings, and machinery outright needs more fixed capital upfront than one that leases or hires them, which spreads the cost over time instead of committing a large sum at once.
5. Diversification and expansion plans. A company planning to diversify into new products or expand its existing capacity must provide, in advance, for the additional fixed capital such plans will require. …