What Are The Factors Determining The Requirments Of Fixed Capital?

Fixed capital is the fund which is required for the purchase of those assets that are to be used over a long period. Such assets are land, building, machinery, payment rights, copy rights and other overhead expenses. These expenses are born regardless of the number of units produced. Fixed capitals are thus, the funds which are required not only for the purchase of fixed asset but also non current assets at the start of business like copy right, registration etc.

The main factors which determine the requirement of fixed capital in a business are as follow.Nature of business: it determines the amount of fixed capital in a business. Huge fixed investment is required in public enterprises such as railways, electricity; sewerage system etc. manufacturing concerns also need sizeable amount of fixed capital trading and financial firms need less fixed capital. They require more working capital to invest in current assets.

Size of business: capital required by a business depends upon its size. Generally the large size of business, the greater is the need of fixed capital and vice versa.Type of business: if an industry requires automatic machines and uses modern techniques of production, it calls for the larger investment in fixed assets.Non current assets: investment in non current assets, like goodwill, patent, copy right, long term investment etc are a part of fixed capital and influence the fixed capital of a business.

The requirement of fixed capital depends upon various factors which are explained below:

1. Nature of Business:

The type of business Co. Is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as trading company does not need plant, machinery, etc.

2. Scale of Operation:

The companies which are operating at large scale require more fixed capital as they need more machineries and other assets whereas small scale enterprises need less amount of fixed capital.

3. Technique of Production:

Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery.

4. Technology Up-gradation:

Industries in which technology up-gradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery whereas companies where technological up-gradation is slow they require less fixed capital as they can manage with old machines.

5. Growth Prospects:

Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital.

6. Diversification:

Companies which have plans to diversify their activities by including more range of products require more fixed capital as to produce more products they require more plants and machineries which means more fixed capital.

7. Availability of Finance and Leasing Facility:

If companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets on easy installments instead of paying huge amount at one time. On the other hand if easy loan and leasing facilities are not available then more fixed capital is needed as companies will have to buy plant and machinery by paying huge amount together.

8. Level of Collaboration/Joint Ventures:

If companies are preferring collaborations, joint venture then companies will need less fixed capital as they can share plant and machinery with their collaborators but if company prefers to operate as independent unit then there is more requirement of fixed capital.