Fixed and Working Capital

Fixed and Working capital form an important part of Commercial studies. But the topic is a bit complicated therefore students who have just started studying about it may require help in homework for the same.

Fixed capital means the funds which are required to acquire those assets that are to be used over and over for a long period such as building, equipment, land, machinery and tools.

It is also known as block capital as for the lifetime of the enterprise, it is blocked up in fixed assets. There are some factors which affect the fixed capital and are required to be noted for assignment help for students studying on the topic, which are as follows:

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Nature of Business:

There is a variation in the amount of fixed capital from industry to industry. Heavy investment in fixed assets such as plant and machinery and land and building are required by manufacturing enterprises.

Public utility undertakings like city transport undertakings, railways and electricity supply concerns also require heavy investment in fixed capital. But less investment in fixed capital is required by trading concerns.

Size of the Business:

A small scale firm requires a less amount of fixed capital than a large sized enterprise. For example, a mini steel plant does not require huge investment in fixed capital as compared to a giant steel company such as the Tata Iron and Steel Company.

For a high volume of production, a large amount of fixed capital is necessary.

Nature of Product:

The amount of fixed capital can be determined through the types of products produced. Large amount of fixed capital will be required by a company manufacturing capital goods like engines, machinery, etc.

On the other hand, a small amount of fixed capital will be required by a firm producing consumer products like hair oil, soaps, toothpastes, etc.

Similarly, firms operating in light industries such as sugar mills will require less fixed capital than firms operating in heavy industries such as shipbuilding.

Method of Production:

Company employing labor intensive techniques such as hand tools requires less capital as compared to a company employing capital intensive techniques of production such as automatic machinery.

For example, a handloom unit requires a lesser amount of fixed capital than a power loom plant.

Mode of acquiring Fixed Assets:

A huge amount of capital is required when a business firm purchases fixed assets on a cash basis. On the other hand, an enterprise will need less fixed capital if it acquires plant and machinery, land and building and other fixed assets on lease or hire.

Working capital refers to the capital which is invested in current assets or working assets such as stock of goods, short-term investment, cash, debtors, etc. It tells us about the liquid funds that an enterprise requires for day-to-day operations.

It is also known as revolving capital or circulating capital as it keeps on revolving or circulating in business. During the operating cycle of business, it is invested, recovered and reinvested repeatedly.

There are different types of working capital which are yet again mandatory to be taken a note of for assignment help in Commercial Studies, which are as follows:

Permanent working capital:

It means the working capital that is required permanently so that it can operate the minimum level of business activity. Permanent working capital is locked up in current assets permanently. Therefore, it is raised through long-term sources of finance. It is of two types:

a) Initial working capital:

It is that part of permanent working capital which is required by the business at the time of its commencement. This is that amount which is needed to start the business activities.

The business usually does not get credit from suppliers in the initial stage. Hence, all operating expenses are to be incurred in cash. Generally, the owners provide the capital to meet initial operating expenditure.

b) Regular working capital:

It is that part of permanent working capital which is necessary to carry on the continuous business operations. The excess of current assets over current liabilities is represented by it.

It has enough cash to build up inventory, to meet short-term obligations and has enough stock of finished goods so that the quick delivery to the consumers could be ensured.

Temporary or Variable working Capital:

The working capital that is required in addition to the permanent working capital is known as temporary or variable working capital. Special and seasonal needs of business can be met with the help of this capital.

It is known as variable working capital because it is fluctuating in nature. The amount of temporary working capital is dependent upon the exigencies of urgent circumstances and the extent of extra demand in season.

Generally, the short-term source of finance is used to raise it. It is of two types:

a ) Seasonal working capital:

The extra working capital that is required during a particular season is known as seasonal working capital. During the busy season, the firm dealing in products of seasonal nature such as garment, umbrellas, woolen, fans, etc.

require more working capital. Additional working capital is required to pay extra labor and to buy raw materials. For example, wheat, sugarcane, cotton, etc.

have to be purchased in large quantities during the season when these items are produced.

Special working capital:

The extra funds that are required to meet the future contingencies that may arise in future is known as special working capital. To act as a cushion in times of emergencies,

it is advisable to set up a reserve working capital. There are various unforeseen contingencies that a business firm may set aside additional funds for, which are as follows: