Question

Justify the following statement.

There are various factors affecting the requirement of fixed capital.

Answer 1

There are various factors affecting the requirement of fixed capital. Some of them are as follows:

1. Nature of Business: The nature of business plays a vital role in determining fixed capital requirements.
   For instance, a manufacturing company needs more fixed capital than a trading company. This is because, the trading company does not need a plant, machinery, etc.
2. Size of business: The companies which are operating at large scale require more fixed capital, as they need more machinery and other assets.
   Whereas small-scale businesses need less fixed capital. Hence, the size of the firm, either in terms of its assets or sales, affects the need for fixed capital.
3. Scope of business: The scope of business is the maximum extent up to which a business can act or perform its business activities.
   If the scope of business is vast, it needs higher fixed capital. For instance, a company involved in multiple activities like manufacturing processing, and assembling usually needs a substantial amount of fixed capital. Similarly, if the scope of business is limited, then it requires less fixed capital.
   For instance, if a company does only assembling activities, it needs a smaller amount of fixed capital.
4. The extent of lease or rent: If companies can arrange financial and leasing facilities easily, then they require less fixed capital, as they can acquire assets in easy instalments instead of paying a huge amount at one time.
   On the other hand, if the easy loans and leasing facilities are not available, then more fixed capital is needed, as companies will have to buy plants and machinery by paying huge amounts together.
5. Choice of Technique: Those manufacturing enterprises which make use of modern and automatic machines need a large amount of fixed capital.
   On the other hand, those enterprises in which production is carried out mainly through labour need less fixed capital.