Explain briefly five factors determining the amount of fixed capital.
Fixed capital refers to the capital which is used for the purchase of fixed assets, such as land, building, machinery etc.
Following factors are to be considered before determining its requirement.
a. Nature of Business: If a firm is a manufacturing fir, it requires to purchase fixed assets for the production process. It needs investment in fixed assets, so require more fixed capital. Similarly if it is a Trading firm where the finished goods are only traded e purchased and sold, it needs less fixed capital.
b. Scale of operations larger the size and scale of operations larger is the requirement of the fixed capital and vice
c. Choice of technique: The Manufacturing firm using the modern, latest technology machines has to invest more funds in the fixed assets, so they require more fixed capital. On the other hand, firms using the traditional method of production where the task is performed manually by the labourers, it requires less fixed capital.
d. Diversification : There are few firms and organizations who deal in a single These investment in fixed assets is low, whereas the firms dealing in number of products ( Diversification) requires more investment in purchasing different fixed assets, it requires more fixed capital.
e. Financing alternatives: If the manufacturing firm actually buys the assets and blocks huge funds in the fixed assets, it requires more fixed capital. The companies who acquire the fixed asset and use them by obtaining leasing facilities, it requires less fixed capital. Leasing is suitable in high risk lines of business where huge funds should not be blocked in the fixed
