Question

State any four factors affecting fixed capital requirement.

Answer 1

Factors affecting fixed capital requirement:

1. NATURE OF BUSINESS- Manufacturing industries and public utilities have to invest a huge amount of funds to acquire fixed assets. While the Trading business may not need huge investments in fixed assets.
2. SIZE OF BUSINESS- Where a business firm is set up to carry on large scale operations, its fixed capital requirements are likely to be high. It is because most of their production processes are based on automatic machines and equipment.
3. SCOPE OF BUSINESS- There are business firms which are formed to carry on production or distribution on a large scale. Such businesses would require more amount of fixed capital.
4. EXTENT OF LEASE OR RENT- If an entrepreneur decides to acquire assets on a lease or on a rental basis, less amount of funds for fixed assets will be needed for the business.
5. ARRANGEMENT OF SUB-CONTRACT- If a business chooses to sub-contract some processes of production to outside companies, then limited assets are required to carry out the production. This would minimize the fixed capital requirement of the business. 
6. ACQUISITION OF OLD ASSETS- If the company can acquire old equipment and plants at low prices, then it would reduce the need of investments in fixed assets.
7. ACQUISITION OF ASSETS ON CONCESSIONAL RATE- In order to encourage industrial growth at regional level, government may provide land and building, materials etc. at concessional rates. Plants and equipment may also be made available on instalment basis. Such facilities will reduce the fixed capital requirements of a business.
8. INTERNATIONAL CONDITIONS- International conditions play a significant role, particularly in large organisations carrying business at international levels. E.g.: if a company is expecting war, it may decide to invest huge amount of funds to expand fixed assets before there is a shortage.
9. TREND IN ECONOMY- If it is expected that the business is going to be successful and has a bright future, then the businessmen will be allowed to carry out all sorts of business expansion. In that case, large amounts of funds are invested in fixed assets so as to reap the benefits in the future.