Fixed capital

Lesson 5 : Process of Initiating an Enterprise

Fixed capital

Refers to funds necessary to acquire fixed assets like land, building, machinery and equipments.
  • Such assets cannot be easily moved from the business site.
  • They provide the base or foundation of the business.

Factors determining Fixed Capital:
As fixed capital is needed to meet the long term requirements of the business, it is necessary to estimate the amount with utmost care. Following are the factors that may be kept in view for estimating fixed capital requirements.

  1. Nature of Business:
    • In a manufacturing firm larger amount of fixed capital is required for building, machine etc. which require more funds to be invested.
    • In a trading concern fixed capital required is smaller as the fixed assets like furniture etc. do not involve large investment.

  2. Size of business:
    • The amount of fixed capital required depends upon the size of enterprise i.e., larger the size greater will be the need for fixed capital.

  3. Types of goods produced:
    • If a business manufactures consumer goods like soap, hair oil etc smaller amount of capital is required but if it manufactures industrial goods like machine tools and equipments, more fixed capital will be required.

  4. (d) Production Technology:
    • In a capital intensive production unit the amount of fixed capital required will be more but it will be less if labour intensive technology is used.

  5. (e) Method of acquisition of fixed assets:
    • If fixed assets are purchased, it will require more fixed capital initially than if the assets are procured on lease or hired.

Sources of fixed capital: Following are the main sources of fixed capital:

  1. Ownership Capital:
    The entrepreneur or partners may invest their own savings as capital. This amount of capital is not refundable. In case of a company, share holders contribute the capital as owners.

  2. Borrowed Capital:
    Long term loans may be arranged from different sources, such as (i) Commercial banks, and (ii) financial institutions. Banks grant term loans for two to ten years as per the government’s credit policy for small scale industries. The banks extend credit to such industries as part of priority – sector lending. There are all–India and state–level financial institutions. Besides there is the Small Industries Development Corporations and Small Industries Development Bank of India which extend long term loans on easy terms to small scale units.
Last modified: Friday, 6 January 2012, 5:08 AM