i. Fixed capital refers to investment in long-term assets.
ii. Management of fixed capital involves allocation of firm’* capital to different longterm assets.
iii. These decisions are called investment decisions or capital budgeting decisions. These decisions affect the growth, profitability and risk of the business in the longrun.
Factors affecting the requirement of fixed capital
i. Nature of the Business:
a. The type of business has a bearing upon the fixed capital requirements.
b. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organization; since it does not require to purchase plant and machinery etc.
ii. Scale of Operations:A larger organization operating at a higher scale needs ** plant, more space, etc. and therefore, requires higher investment in fixed assets when compared with the small organization.
iii. Choice of Technique:
a. Some organizations are capital-intensive whereas others are labour-intensive.
b. A capital intensive organization requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organizations would be higher.
c. Labour intensive organizations, on the other hand, require less investment in fixed assets. Hence, their fixed capital requirement is lower.
iv. Technology Upgradation:
a. In certain industries, assets become obsolete sooner.
b. Consequently the replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases.
c. For example, computers become obsolete faster and are replaced much sooner than, say, furniture. Thus such organizations which use assets which are prone to obsolescence require higher fixed capital to purchase such assets.
v. Growth Prospects:
a. Higher growth of an organization generally requires higher investment in fixed assets.
b. Even when such growth is expected, a business may choose to create higher capacity in order to meet the anticipated higher demand quicker.
c. This entails higher investment in fixed assets and consequently higher fixed capital.
