Fixed capital refers to investment in long-term assets. Investment in fixed assets like land, plant and machinery for longer duration and they must be financed through long-term sources of capital. Decisions relating to fixed capital involve huge capital and are not reversible without incurring heavy losses.
Factors Affecting Requirement of Fixed Capital
1. Nature of Business : Manufacturing concerns require huge investment in fixed assets & thus huge fixed capital is required for them but trading concerns need less fixed capital as they are not required to purchase plant and machinery etc.
2. Scale of Operations : An organisation operating on large scale requires more fixed capital as compared to an organisation operating on small scale. For Example - A large scale steel enterprise like TISCO requires large investment as compared to a mini steel plant.
3. Choice of Technique : An organisation using capital intensive techniques requires more investment in plant & machinery as compared to an organisation using labour intensive techniques.
4. Technology upgradation : Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations.
5. Growth Prospects : Companies having more growth plans require more fixed capital. In order to expand production capacity more plant & machinery are required.
6. Diversification : In case a company goes for diversification then it will require more
7. Distribution Channels : The firm which sells its product through wholesalers and retailers requires less fixed capital.
8. Collaboration : If companies are under collaboration, Joint venture, then they need less fixed capital as they share plant & machinery with their collaborators.
