Fixed & working capital
Meaning of fixed capital :- it refers to that capital which is use for the purchased of fixed assets such as land , building.
Managing fixed capital is related to investment decision & it is also called capital budgetting . the capital budgetting decision affect the growth & profitability of the company . a capital budgetting decision include land & building , plant & machinery , research & development .
factors affecting requirement of fixed capital :-
1. Nature of business :- in this factor which help indicating the requirement of fixed capital as compare to trading company .as trading company does not need land & machinery etc.
2. Scale of operation :- the company which are operating at large scale require more fixed capital where as small scale need less fixed capital .
3. Technique of production :- company using capital intensive technique require more fixed capital where as company using labour intensive need make use of p&m & company need more fixed capital .
4. Technology upgradation :- industries in which technology upgradation fast need more fixed capital where as gradation is slow they require less fixed capital .
5. Growth prospectus :- company which are expanding & having higher growth plan require more fixed capital .
6. Diversification :- company which have plan to diversity their activity by including more range of product required more fixed capital as to produce more products they require more land & machinery which means more fixed capital .
7. availability of finance & leasing facility :- if company can arrange financial & leasing faccility easily then they require less fixed capital is needed .if easy loan & leasing faccility are not available then more fixed capital is needed as company .
8. Level of colboration/joint venture :- if company are preffering calboration , joint venture then company will need less fixed capital as they can share p&m with their callobrations .
working capital :- it refers to excess of current assets& current liabillities .
working capital = current assets - current liabillities
types of working capital :-
a) gross working capital :- these current assets get converted into cash within on accounting year such as cash , b/r , inventory etc .
b) net working capital :- current assets the net working capital indicates the liquidity position of the company . it refers to excess of current asset over current liability .
Factor affecting working capital :-
1. Length of operating capital :- operating time refers to the time period involved in production . if operating cycle is long more working capital is required where as for companies having short operating cycle , the working capital is required where as for companies having short operating cycle . working capital requirement is less .
2. nature of business :- the nature of business usually of two types manufacturing business & trading business . in case of manufacturing business it takes lot of time in converting raw material into finished goods so this business require large amount of working capital .in case of trading business goods are immediately after purchasing or some time the sale is affected even before the purchases itself therefore every wprking capital is required .
3. scale of operation :- the firm operating at large scale need so they generally require large amount of working capital as firms operating at small scale require less working capital .
4. Business cycle fluctuation :- during boom period the market is flourishing which means more amount is required where as during depression period , less working capital is required .
5. Seasonal factor :- working capital requirement is constant for the company which are goods selling throughout the season as more demand more stock has to be maintained & fast supply is needed where as during season demand is very low so less working capital is needed .
6. technology & production cycle :- if a company is using labour incentive technique of then more working capitaal is required where as if company is using incentive technique of production then less working capital is required . there will be less operating expenses . in casa of production cycle if production is long then more working working capital is required where as if when production is smaller lesser funds are tied up in inventory & inventory & raw material . so less working capital is required .
7. Credit allowed :- if company is following liberal credit policy then it will require more working capital where as less working capital .
8. operating efficiency :- the firm having high degree of efficiency which require less amount of working capital as compare to firm having low degree of efficiency which require more working capital firms with high degree of high efficiency have low wastage . thesev firms bear less expenses so they can manage with less working capital .
9. availability of raw material :- if raw material is easy available then firm can manage less amount of working capital . if the supply of raw material is not smooth , the firm need to maintain large inventory to carry on operating cycle smoothly .so they require more working capital .
10. Level of competition :- if a business is with less competition or with monopoly position will require less working capital otherwise more capital is required .
11. Inflation :- if there is increase in rise in price of raw & material & cost of labour it will result in an increase in working capital requirement but if company is able to increase the price of its own good as then there will be less problem of working capital .
12. Growth prospectus :- if the firm plan to expand its activities will require more amount working capital as far expansion they need to increase scale of production which means more capital .
Meaning of fixed capital :- it refers to that capital which is use for the purchased of fixed assets such as land , building.
Managing fixed capital is related to investment decision & it is also called capital budgetting . the capital budgetting decision affect the growth & profitability of the company . a capital budgetting decision include land & building , plant & machinery , research & development .
factors affecting requirement of fixed capital :-
1. Nature of business :- in this factor which help indicating the requirement of fixed capital as compare to trading company .as trading company does not need land & machinery etc.
2. Scale of operation :- the company which are operating at large scale require more fixed capital where as small scale need less fixed capital .
3. Technique of production :- company using capital intensive technique require more fixed capital where as company using labour intensive need make use of p&m & company need more fixed capital .
4. Technology upgradation :- industries in which technology upgradation fast need more fixed capital where as gradation is slow they require less fixed capital .
5. Growth prospectus :- company which are expanding & having higher growth plan require more fixed capital .
6. Diversification :- company which have plan to diversity their activity by including more range of product required more fixed capital as to produce more products they require more land & machinery which means more fixed capital .
7. availability of finance & leasing facility :- if company can arrange financial & leasing faccility easily then they require less fixed capital is needed .if easy loan & leasing faccility are not available then more fixed capital is needed as company .
8. Level of colboration/joint venture :- if company are preffering calboration , joint venture then company will need less fixed capital as they can share p&m with their callobrations .
working capital :- it refers to excess of current assets& current liabillities .
working capital = current assets - current liabillities
types of working capital :-
a) gross working capital :- these current assets get converted into cash within on accounting year such as cash , b/r , inventory etc .
b) net working capital :- current assets the net working capital indicates the liquidity position of the company . it refers to excess of current asset over current liability .
Factor affecting working capital :-
1. Length of operating capital :- operating time refers to the time period involved in production . if operating cycle is long more working capital is required where as for companies having short operating cycle , the working capital is required where as for companies having short operating cycle . working capital requirement is less .
2. nature of business :- the nature of business usually of two types manufacturing business & trading business . in case of manufacturing business it takes lot of time in converting raw material into finished goods so this business require large amount of working capital .in case of trading business goods are immediately after purchasing or some time the sale is affected even before the purchases itself therefore every wprking capital is required .
3. scale of operation :- the firm operating at large scale need so they generally require large amount of working capital as firms operating at small scale require less working capital .
4. Business cycle fluctuation :- during boom period the market is flourishing which means more amount is required where as during depression period , less working capital is required .
5. Seasonal factor :- working capital requirement is constant for the company which are goods selling throughout the season as more demand more stock has to be maintained & fast supply is needed where as during season demand is very low so less working capital is needed .
6. technology & production cycle :- if a company is using labour incentive technique of then more working capitaal is required where as if company is using incentive technique of production then less working capital is required . there will be less operating expenses . in casa of production cycle if production is long then more working working capital is required where as if when production is smaller lesser funds are tied up in inventory & inventory & raw material . so less working capital is required .
7. Credit allowed :- if company is following liberal credit policy then it will require more working capital where as less working capital .
8. operating efficiency :- the firm having high degree of efficiency which require less amount of working capital as compare to firm having low degree of efficiency which require more working capital firms with high degree of high efficiency have low wastage . thesev firms bear less expenses so they can manage with less working capital .
9. availability of raw material :- if raw material is easy available then firm can manage less amount of working capital . if the supply of raw material is not smooth , the firm need to maintain large inventory to carry on operating cycle smoothly .so they require more working capital .
10. Level of competition :- if a business is with less competition or with monopoly position will require less working capital otherwise more capital is required .
11. Inflation :- if there is increase in rise in price of raw & material & cost of labour it will result in an increase in working capital requirement but if company is able to increase the price of its own good as then there will be less problem of working capital .
12. Growth prospectus :- if the firm plan to expand its activities will require more amount working capital as far expansion they need to increase scale of production which means more capital .
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