Fixed capital requirements: In order to start the business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures. This is known as fixed capital requirements of the enterprise. The funds required in fixed assets remain invested in the business for a long period of time.
Different business units need a varying amount of fixed capital depending on various factors such as the nature of the business, etc. A trading concern, for example, may require a small amount of fixed capital as compared to a manufacturing concern. Likewise, the need for fixed capital investment would be greater for a large enterprise, as compared to that of a small enterprise.
Fixed capital involves allocation of firm’s capital to long-term assets or projects. Managing fixed capital is related to the investment decision and it is also called Capital Budgeting. The capital budgeting decision affects the growth and profitability of the company.
Factors Affecting Requirement of Fixed Capital:
- Nature of Business
- Scale of Operation
- Technique of Production
- Technology Up-gradation
- Growth Prospects
- Availability of Finance and Leasing Facility
- Level of Collaboration/Joint Ventures