Question

State any three factors that determine the requirement of fixed capital of a company.

State any three factors that affect the fixed capital requirements of a company.

Answer 1

The factors that affect the fixed capital requirements are:

1. Nature of business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern requires less investment in fixed assets than a manufacturing organisation, as it does not purchase plant and machinery.
2. Scale of operations: A larger organisation operating at a larger scale needs a larger plant, more space, and other resources, and therefore requires a higher investment in fixed assets than a small organisation.
3. Choice of technique (production): Some organisations are capital-intensive, whereas others are labour-intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour-intensive organisations, on the other hand, require less investment in fixed assets. Hence, their fixed capital requirement is lower.
4. Technology upgrade: In certain industries, assets become obsolete more quickly. Consequently, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases. For example, computers become obsolete faster and are replaced much sooner than, say, furniture. Thus, organisations that use assets prone to obsolescence require higher fixed capital to purchase them.
5. Growth prospects: Higher growth generally requires greater investment in fixed assets. Even when such growth is expected, a company may choose to increase capacity to meet the anticipated higher demand quickly. This entails a greater investment in fixed assets and, consequently, a larger fixed capital base.
6. Diversification: A firm may choose to diversify its operations for various reasons. With diversification, fixed capital requirements increase, e.g., a textile company is diversifying into cement manufacturing. Obviously, its investment in fixed capital will increase.