Definition of Fixed Capital Requirement: Fixed capital refers to the capital that is required for meeting the permanent or long term needs of the business. Fixed capital exists in the form of investment made in fixed assets like land, building, plant and machinery etc.
The following are the factors that should be kept in mind while planning for fixed capital.
- Nature of the business: The amount of fixed capital depends on whether the business is trading or manufacturing or service oriented.
- Size of the business: Large business requires large fixed capital and small business requires small fixed capital.
- Technology used in the production: The more the sophisticated the technology, the more the requirement for the fixed capital. On the otherhand if the business is labour intensive, then the amount of fixed capital required might be less.
- Range of production: If the business deals with diversified range of products (the number of products is more), then more fixed capital is needed. On the otherhand if the business deals with a single or less number of products, less fixed capital is needed.
- Type of product manufactured: If the product is more complex (like a car or computer), it requires more complicated machinery and hence more is the fixed cost. On the otherhand, if the product manufacture is simple (like a mobile phone case), the fixed capital required is less.
- Method of acquisition of fixed assets: When the business decides to buy the fixed assets, the fixed capital required is more. On the other hand, if the business decides to hire or lease the fixed assets, the fixed capital requirement is comparatively lesser.
