What is Fixed Capital: Types and Importance

Fixed capital is a portion of total capital outlay invested into fixed assets that remain permanently within the business for at least one period of accounting. The circulation of this type of capital is for a longer period of time.

In this article on what is fixed capital, we will be discussing the types and importance of this type of capital.

Table of Contents

• What is Fixed Capital?
• Requirement
• Importance
• Types

What is Fixed Capital?

Fixed capital in accounting is a real and physical assets used repeatedly in producing products. In economics, it refers to a type of capital good that is used as a means of production which is durable. It includes assets and capital investments that are required for start up and conducting business from a minimal age. 

Such assets are considered fixed in a way that these are not consumed or destroyed during actual good or service production having reusable value. Such capital investments are typically depreciated on the accounting statements of the company over a long time period. 

It is the portion of total capital outlay of a business invested in physical asset that stay permanently in business for more than one accounting period. Fixed assets are purchased and owned by business or can e structured as a long-term lease.

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Requirement

For any business to run smoothly, this type of capital is required while varying from industry to industry. Some of the businesses require large amount of fixed-capital assets. Procuring this type of capital is a lengthy process even if production businesses have easier access to the inventory required for creating goods. 

Through fixed capital, businesses can efficiently produce goods and services effectively. It also helps businesses and organization in staying in the competition within the marketplace. By investing in modern fixed assets, businesses can produce goods and services at a lower cost to increase profitability. 

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Factors Impacting the Requirement for Fixed Capital

The following factors impact the requirement for fixed capital:

1. Scale of the business: This factor is directly proportional with the scale of the business. The larger is the size of your business and its operation, the higher is the requirement for fixed capital. Similarly, if the business is on a small scale, then the requirement for fixed capital is also lesser.
2. Growth expectation: As the company starts working and planning growth objectives, the requirement for capital also grows. This is due to the fact that companies need assets for increasing production and running operations smoothly.
3. Collaboration: When a company collaborates with another company, the requirement for capital also increases. In case the company operates completely on its own, also has higher capital requirements.
4. Production technique: The requirement for fixed capital also depends on the production technique being employed. If the is capital intensive then the requirement for capital will be more in comparison with a company that uses labour-extensive techniques. 

Importance

The following points highlight the importance of fixed capital:

• Starting a business: To start a business, a company needs capital since without capital. No business can be initiated without capital since inventory and material are required for starting the business. Land, inventory and raw materials can be all purchased through fixed capital.
• Modernising a company: For modernising a company, requirements are there to improve the infrastructure of a company. To improve the efficiency of the system, it is important to invest in technology.
• Promoting a company: After the establishment of the company, the promoters require capital to pay for their promotional expenses. These expenses cover the cost incurred on payment of establishment expenses, project report preparation, professional fees and issuance of company prospectus.
• Expansion: It helps in expanding and diversifying the company. When the company wants to grow in the same sector, then it requires capital for expansion and when the business wants to grow into further sectors, it requires capital for diversification.  
• To stay in competition: When the company wants to stay in the competition, then it needs capital for marketing and promotional activities. 

Types of Fixed Capital

Since this capital includes those assets that generate revenue over an extended time period, these are not liquid and cannot be converted into cash easily. Following are the different types of fixed capital:

1. Land: It is one of the largest fixed capital since it can be utilized for numerous requirements. Land can be used for starting a factory, office space or storage purposes. Its value increases with time. 
2. Equipment: This is a type of fixed capital which is used for the production of goods and services. Tools, machines, and vehicles are some of the equipment that are part of fixed capital. 
3. Building: Just like land, buildings are also important capital since they are multipurpose in nature. These can be used for storage, office space or even manufacturing facilities. 
4. Intellectual property: These include trademarks, copyrights and other intangible assets that are used for generating revenue for a business. Such assets can be licensed or sold to other companies due to which they offer a competitive advantage to the company.
5. Infrastructure: These are the physical systems that are required for the smooth operation of a business. These include bridges, utilities, roads as well as telecommunication networks. 
6. Natural resources: These include oil, gases and minerals that are essential for the production process.