The capital invested in fixed assets like land and buildings, plant and machinery, furnitures and fixtures etc, is known as fixed capital. How much is to be invested in fixed assets is determined by many factors.
Factors affecting fixed capital requirement :
- Nature of Business
The type of business has a bearing upon the fixed capital requirements, e.g. a trading concern needs lower investment in fixed assets compared with a manufacturing organisation, since it does not require to purchase plant and machinery, etc.
- Scale of Operations
A larger organisation operating at a larger scale needs higher investment in fixed assets as compared to a small organisation.
- Choice of Technique
Some organisations are capital intensive, whereas, others are labour intensive. A capital intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets.
- Technology Upgradation
In certain industries, assets become obsolete sooner. Consequently, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases, e.g. computers become obsolete faster and are replaced much sooner than say, furniture.
Thus, such organisations which use assets, prone to obsolescence, require higher fixed capital to purchase such assets.
- Growth Prospects
Higher growth of an organisation generally requires higher investment in fixed assets.* Even when such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quickly. This entails’" larger investment in fixed assets and consequendy larger fixed capital.
When a company wants to enter into a new business other than that of its current product, it requires more fixed capital, e.g. an Apparel Company diversifying into cosmetic business, will certainly require more fixed capital for investing into plant and machinery, building, etc.
- Financing Alternatives
If alternatives of leasing or hire purchase are available, the assets are not to be purchased outrightly, but only rent or installments have to be paid. This reduces the requirement of fixed capital.
- Level of Collaboration
The collaborations between the organisations use one another’s facilities-and assets reduce the need for fixed capital, e.g. banks are using each other’s ATMs, "thus saving on individual setting of ATMs by each bank, which entails huge expenditures.