Question

Answer the following question.
Explain briefly any four factors affecting the fixed capital requirements of an organisation.

Answer the following question.
Explain briefly any four factors that affect the fixed capital requirements of a company.

Answer 1

Factors affecting the fixed capital requirements of an organisation:

• A scale of operations: A company which is operating in a large-scale of operations will require larger fixed assets in the form of plants, land, and building.
  Larger organisation ⇒ Higher investment in fixed assets
  Small organisation ⇒ Lower investment in fixed assets
• Choice of technique: A company may use labour-intensive or capital-intensive techniques. A company using capital-intensive techniques will require larger fixed assets, whereas a company using the labour-intensive technique will require less fixed assets.
  Capital-intensive organisation ⇒ Higher investment in fixed assets
  Labor-intensive organisation ⇒ Lower investment in fixed assets
• Technology up-gradation: Due to changes in technology or it becoming obsolete over time, companies require a large amount of investment in fixed capital. For example, certain machinery becomes obsolete very soon compared to other assets such as furniture. Therefore, a larger fixed capital is required for upgradation.
  Faster up-gradation ⇒ Higher investment in fixed assets
  Slower up-gradation ⇒ Lower investment in fixed assets
• Financing alternatives: If leasing facilities are available without any lengthy procedures in the financial market, then the fixed capital requirements will be less. 
  Non-availability of financing alternatives⇒ More fixed capital
  Availability of financing alternatives ⇒ Less fixed capital
• Growth prospects: a Higher growth of an organisation requires a higher investment in fixed assets. When growth is expected, a company usually chooses to create a higher capacity to meet anticipated higher demand. This further requires a larger investment in capital.
• Type of business: The type of business has a direct bearing upon the fixed capital requirements of the firm. A trading concern needs lower investment in fixed assets as compared to a manufacturing business having a large operating cycle.