Introduction to Corporate Finance — Secretarial Practice STD 12 Commerce / Arts — Question

Fixed capital is the capital that is used for buying fixed assets. Fixed Capital or Fixed assets stay in the business for a longer period of time. These assets are not meant for resale. It stays in the business almost permanently.
e.g. Capital used for purchasing land and building, furniture, plant, and machinery, etc.

Factors determining fixed capital requirements are:
(i) Nature of business:
The nature of business certainly plays a role in determining fixed capital requirements. They need to invest a huge amount of money in fixed assets.
e.g. Rail, road, and other public utility services have large fixed investments.

(ii) Size of business:
The size of a business also affects fixed capital needs. A general rule applies that the bigger the business, the higher the need for fixed capital. The size of the firm, either in terms of its assets or sales, affects the need for fixed capital.

(iii) Scope of business:
Some business firms that manufacture the entire range of their production would require a huge investment in fixed capital. However, those companies that are labour intensive and who do not use the latest technology may require less fixed capital and vice versa.

(iv) Extent of lease or rent:
Companies who take their assets on a lease basis or on a rental basis will require less amount of funds for fixed assets. On the other side, firms which purchase assets will naturally require more fixed capital in the initial stages.

(v) Arrangement of sub-contract:
If the business wants to sub-contract some processes of production to others, limited assets are required to carry out the production. It would minimize the fixed capital requirement of the business.

(vi) Acquisition of old assets:
If old equipment and plants are available at low prices, then it would reduce the need for investment in fixed assets.

(vii) Acquisition of assets on concessional rate:
With the view to foster industrial growth at the regional level, the government may provide land and building materials at concessional rates. Plants and equipment may also be made available on an installment basis. Such facilities will reduce the requirement of fixed assets.

(viii) International Conditions:
This factor is very significant particularly in large organizations carrying business at an international level. For example, companies expecting war, may decide to invest large funds to expand fixed assets before there is a shortage of materials.

(ix) Trend in the economy:
Economic trends also influence fixed capital requirements. During the recession, companies do not undertake expansion projects, therefore the company may not require much of fixed capital. But in anticipation of a bright future company would require additional fixed capital for expansion and modernization.

(x) Population trend:
When the population is increasing at a high rate, certain manufacturers find this as an opportunity to expand the business. For example, the Automobile industry, electronic goods manufacturing industry, ready-made garments, etc. which asks for a huge amount of fixed capital.

(xi) Consumer preference:
Industries providing goods and services which are in good demand will require a large amount of fixed capital e.g.: Mobile phone manufactures as well as mobile network providers.

(xii) Competition:
This factor is a prime element in fixed capital requirement decisions. If one competitor shifts to automation, the other companies in the same line of activity usually follow that competitor.