Management of fixed capital

 Fixed capital refers to investment in long-term assets for the business. It also involves the allocation of firms’ capital to different projects or assets with long terms implications for the business. These investments are also called capital budgeting decisions and affect the growth, profitability, and risk of the business in the long run. These long-term assets are long terms and more than one year. 

These investments must be financed through long-term sources of capital such as preference shares, equity shares, debenture, long terms loans, retained earnings of the business, and many more. It also includes the expenses for acquisitions, expansion, modernization, and replacement-related expenses. the fixed assets include investing in land for business purposes, plants, types of machinery, and any other assets that are mainly for business. It also includes launching a new business line and investing in advanced technology. Businesses expand a lot in the advertisement companion and research, and development program that will take a long time for the implication these are the example of fixed capital or investment. Some of the points show the importance of fixed capital. These are listed below. 

  • Long-term benefits: the investment is beneficial for long-term growth. These are very important in the prospect of the future. 
  • Huge investment: fixed capital investment required a lot of money. The decision of investing the fixed capital funds covers long-term projects so that these investments are planned after a detailed analysis. It also involves decisions like businesses considering how they procure funds and at what rate of interest. 
  • Involvement of risk: fixed capital requires not only a huge amount but also high risk in proportion to the amount of investment. It highly impacts the returns of the firm in long term. Therefore, it involves high risk and influences the overall business also. 
  • Irreversible decision: these decisions are irreversible once they were taken. If any business wants to change then it will incur heavy loss. Aborting any project after making a heavy investment that will become costly in terms of wastage of the fund. Therefore, this type of decision should be taken after proper evaluation of each detail, or else that affect the business financial also

Factors affect the requirement of fixed assets

These investments affect business a lot and also involve high risk. Several factors should consider before investing the fixed capital. Some points are listed. 

Business nature 

This is the most important factor that business needs to consider before investing. The requirement of the fixed assets is depending on the nature business also. The requirements of assets rely on business to business. For example requirement of the fixed assets is very less for trading purposes in comparison to the manufacturing business. 

Operation scale 

If a business is operating on a large scale then the requirement of the plants and types of machinery, and other fixed assets will large and the business need to invest in bulk. And small organization requires a low amount of assets. 

Choice of technology 

Some businesses require large human recourses and some businesses are requires capital amounts. Fixed capital investment is also depending on the choices of technologies for the business. A capital-intensive business requirement is a large number of pieces of machinery and advanced technology. Some business requires a huge amount of human resources for completing their projects such as construction companies, manufacturing companies, and many more. Some business requires both capital and human resources also for business operation. 

Growth prospects 

Business requires high investment for business growth. When a company chooses to create a high capacity for completing the quick demand of the public then they should invest in large amount in fixed capital. 

Diversification 

There are various reasons for the diversification of the business. Business requires huge funds for diversifying the business like textile, company diversification, and many more. Diversification is very important for the smooth operation of the business. 

Level of collaborations 

Several businesses share facilities for better performance. If any business is not stratifying the requirement then they will collaborate according to their requirement. In such a case business needs to spend a lot on fixed capital for using each other facilities effectively. 

Financial alternative

There are many sources available in the financial market that provides leasing facilities as an alternative to outright purchase. When the business takes any assets on lease then they will pay lease amount as rental and uses. It helps to business to avoid huge sums required to purchase. Leasing facilities may reduce the fund requirement to investment of fixed assets. But the risk is very high in case taking leasing facilities.

Technology upgrade

There are many companies assets became obsolete sooner. Consequently, they required replacement of technology or up gradation of technology. In this situation, business requires huge investment for up gradation of technology.

Generally, it is not possible for the company to invest in every upgraded technology. However, in the case when most of the competitor companies have adopted the technology, then it becomes essential for the company to invest in up-gradation their technology for surviving well in the competitive environment.         

Bottom line

In this article, there was discussion on fixed capital and factors to be considered while investing in long term assets. This article explained fixed capital as amount invested in business for acquiring fixed assets. It also explained the factors such as business nature, adopting advance technology, and many more which are required to be considered while making the investment.