OMTEX CLASSES: What is Fixed Capital what are the Factors affecting requirement of Fixed capital?

What is Fixed Capital what are the Factors affecting requirement of Fixed capital?

Meaning: -The concept of 'Fixed Capital' was first theoretically analysed by economist David Ricardo. It refers to any kind of real or physical capital i.e. fixed assets. It is not used for the production of goods. Fixed capital is that portion of total capital which is invested in fixed assets such as land, building, equipments, etc.

Definition: -" Fixed Capital also circulates, except that the circulation time is much longer".  (Karl Mark)

Factors affecting requirement of Fixed Capital:

1. Nature of business: -The nature of business certainly plays a vital role in determining fixed capital requirement. For e.g. Rail, Road and other public utility services have large fixed investment. They need to invest in huge sum in fixed assets. Their working capital requirements are nominal, because they supply services and not product. They deal in cash sales only.

2. Size of business: -The size of business also affects fixed capital needs. A general rule applies that the bigger the business, the higher the need of fixed capital. Size of firm, either in terms of its assets or sales, affects the need of fixed capital.

3. Growth and expansion: -A growing firm may need to invest money in fixed assets in order to sustain growing production and turnover.

4. Stage of development of business: -The requirement of fixed capital for a new undertaking is greater than that of an established business.

5. Business Cycle: -When there is boom period in the economy, additional investment in permanent assets may be made by firm to increase their production capacity. Hence the need of fixed capital increases.