Need for Funds & Fixed Capital

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Need for Funds & Fixed Capital

Need for Funds

Funds means money or capital needed to establish and run an enterprise. Capital is called life-blood of an enterprise. Capital to an enterprise is what blood is to a human body. Without adequate blood a human body cannot survive and function. Similarly an enterprise, big or small, cannot survive and run without adequate capital. Broadly speaking capital requirements can be divided into two types :

  1. Fixed Capital, and
  2. Working Capital.

Fixed Capital

Fixed capital is that part of the capital which is invested for a longer time in the assets of a business which cannot be sold during the life-time of the company. For example, land, building, plant and machinery, furniture and fixtures etc.

This capital is fixed in the sense that it remains invested in the business for the lifetime of the business, i.e. remains fixed in the business. It does not change its form (assets are not sold) until the business is closed down. It is needed for meeting the permanent or long term needs of the enterprise.

The fixed capital requirements are determined by calculating the cost of fixed assets required for the business. The amount to fixed capital requirements will depend upon the following:

  1. Nature of Business :

    The nature of business to be carried on by the entrepreneur will determine the amount of fixed capital required. For example, whether it is a public utility concern or a trading concern. A public utility concern like a railway company will need a large amount of capital to be invested in fixed assets and equipment such as railway lines, rolling stock (engine and coaches), railway stations, railway sidings etc. Similarly an electricity company will require huge investment in fixed assets such as power house for generation of electricity and transmission network for distribution of power. On the other hand a trading concern will need very little or no capital investment in fixed assets and equipment.

  2. Mode of acquiring the fixed assets :

    The mode or method of acquiring the fixed assets will also determine the amount required for fixed assets. If land and building are to be purchased, a large amount of fixed capital will be needed. On the other hand, if the land and building are to be taken on lease or rent fixed capital requirements will be negligent or comparatively very low.

  3. Size of business :

    The size of the business enterprises will also determine the amount of fixed capital. The larger the size, the larger will be fixed capital requirements and vice versa.

  4. Technique of Production :

    An enterprises using capital intensive technology will need more fixed capital as compared to the one using labour intensive technology.

  5. Cost of acquiring intangible assets :

    In case an enterprises has to purchase intangible assets like goodwill, patents or trademark it will need large fixed capital to buy such assets. Needless to say, heavy investment will be needed to buy such assets particularly when the goodwill or patent is known globally.

Besides investment of huge capital in fixed assets, a part of total capital will also be invested in a certain minimum amount of working capital which an enterprise must always keep with itself. For example, certain minimum amount of cash and bank balance, stock of goods, raw materials, etc.

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