Revision: Unit-2 : Financing >> Capital - Fixed and Working Commerce ISC (Commerce) Class 12 CISCE

According to C.W. Gerstenberg, "Capital structure means the type of securities to be issued and the proportionate amounts that make up the capitalisation."

 According to B.O. Wheeler, "Business finance is concerned with the acquisition and utilisation of capital funds in meeting the financial needs and overall objectives of a business enterprise".

• According to Shubin, "fixed capital means the funds required for the acquisition of those assets that are to be used over and over for a long period such as land, building, machinery, equipment and tools".
• In the words of Wheeler, "fixed capital is invested in fixed or long-term assets. The amount of fixed capital needed, therefore, varies directly with the amount of fixed assets owned or used by a business". 

• According to Shubin, "working capital is the amount of funds necessary to cover the cost of operating the enterprise. Working capital in a going concern is a revolving fund. It consists of cash receipts from sales which are used to cover the cost of current operations". 
• According to Gerstenberg, "circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another as for example, from cash to inventories, inventories to receivables, receivables into cash". 

• Meaning of Business Finance: Business finance refers to the money and credit used by business firms to carry out their activities smoothly and efficiently.
• Purpose of Business Finance: It involves planning, raising, managing and controlling funds so that money is available whenever required for business operations.
• Scope of Business Finance: Business finance includes estimation of funds, selection of sources of finance, investment of funds, cash management and control of earnings.
• Applicability: Business finance is required by all types of businesses—large or small, manufacturing or trading—and at every stage of business.
• Variable Requirement: The amount of finance needed depends on the nature, size and scale of the business and may change from time to time.

• Essential for Business Operations: Finance is the lifeblood of business. Without adequate funds at the right time and cost, production and sale of goods and services cannot take place.
• Helps Smooth Functioning and Growth: Adequate finance enables a firm to run smoothly, replace machinery, expand, modernise and face business risks like recession and competition.
• Improves Credit and Reputation: Timely payment of debts and wages improves creditworthiness, goodwill and reputation of the business in the market.
• Supports Purchase of Assets: Finance is required to buy fixed assets (machinery, buildings) and current assets (raw materials, stock, cash).
• Determines Size and Opportunities: Availability of finance decides the scale of business operations and helps firms take advantage of profitable business opportunities.

• Meaning of Capital: Capital refers to the money invested in a business to earn profits and is required for both production and distribution of goods and services.
• Sole Proprietorship: It requires limited capital. Funds mainly come from the owner’s own savings, retained profits, loans from friends and relatives, bank loans and credit from suppliers.
• Partnership Firm: Capital is contributed by partners in an agreed ratio. Additional funds come from retained profits, bank loans, partner loans, hire purchase and trade credit.
• Joint Stock Company: It requires large capital. Funds are raised through issue of shares, retained profits, debentures, long-term loans from financial institutions and short-term bank loans.
• Variation in Capital Needs: Capital requirements and sources differ according to the size, nature and scale of business—small firms rely more on personal and bank funds, while large companies use shares and debentures.

• Meaning: Financial planning is the process of estimating financial needs, selecting sources of funds and deciding proper use of funds in advance.
• Future-oriented Process: It involves forecasting future financial requirements and planning when, how and why funds will be used.
• Wide Scope: It includes estimation of fixed and working capital, choice of sources of finance, use of funds and disposal of profits.
• Importance: Financial planning avoids shortage or surplus of funds, ensures effective use of money and helps in maintaining a sound capital structure.
• Key Factors: Financial planning depends on objectives of the firm, nature and size of business, capital market conditions, government regulations and degree of risk.

• Trading on Equity (Financial Leverage): Use of debt along with equity increases return to equity shareholders when earnings are higher than interest, but it also increases financial risk.
• Control Consideration: Promoters may prefer debt or preference shares to avoid dilution of control, as equity shareholders have voting rights.
• Nature and Stability of Business: Firms with stable and regular earnings can use more debt, while firms with fluctuating income should rely more on equity.
• Cost and Purpose of Finance: Debt is cheaper than equity due to tax benefits; equity is suitable for long-term needs, while debentures and preference shares suit medium-term needs.
• Capital Market and Legal Factors: Market conditions, investor preferences, government regulations, and statutory requirements influence the choice of securities and debt-equity ratio.

• Meaning of Fixed Capital: Fixed capital is the money invested in long-term assets like land, buildings, machinery and vehicles, which are used permanently in business.
• Purpose of Fixed Capital: It is required to start a business and for its expansion, modernisation and diversification.
• Nature and Size of Business: Manufacturing and large-scale businesses need more fixed capital than trading and small-scale firms.
• Method of Production and Product Type: Capital-intensive methods and production of heavy or capital goods require higher fixed capital.
• Mode of Acquiring Assets: Purchasing assets needs more fixed capital, while leasing or hire purchase requires less fixed capital.

• Meaning of Working Capital: Working capital is the money invested in current assets like cash, stock, debtors and short-term investments for daily business operations.
• Nature of Working Capital: It is also called circulating or revolving capital because it moves continuously through cash, raw materials, goods and receivables.
• Operating Cycle: In a manufacturing firm, working capital circulates from cash → raw materials → work-in-progress → finished goods → receivables → cash.
• Types of Working Capital:
  Gross working capital means total current assets.
  Net working capital means current assets minus current liabilities.
• Need for Working Capital: It is required to buy raw materials, pay wages and salaries, and meet day-to-day expenses like rent, power and advertising.

• Classification of Working Capital: Working capital is classified into Permanent Working Capital and Temporary (Variable) Working Capital.
• Permanent Working Capital: It is the minimum working capital required permanently to run the business at its normal level and is financed from long-term sources.
• Types of Permanent Working Capital:
  Initial Working Capital is needed at the time of starting the business.
  Regular Working Capital is required for smooth day-to-day operations.
• Temporary (Variable) Working Capital: It is the extra working capital required in addition to permanent working capital and is fluctuating in nature.
• Types of Temporary Working Capital:
  Seasonal Working Capital is needed during busy seasons.
  Special Working Capital is required to meet emergencies like sudden demand, strikes or natural calamities.

• Smooth Business Operations: Adequate working capital ensures timely purchase of raw materials, payment of wages, expenses, and uninterrupted production and distribution.
• Timely Payments & Creditworthiness: Sufficient working capital helps in timely payment of dues, improves credit standing, and enables firms to obtain loans easily on favourable terms.
• Business Opportunities & Discounts: Firms with enough working capital can avail cash discounts, execute bulk purchases, handle urgent orders, and strengthen their competitive position.
• Employee & Shareholder Satisfaction: Adequate working capital ensures timely payment of wages and dividends, improving employee morale and company reputation.
• Factors Affecting Working Capital: Working capital needs depend on nature and size of business, manufacturing cycle, turnover speed, credit policy, seasonal variations, growth plans, and operating efficiency.