Difference Between Fixed Capital and Working Capital (6 Points)

Difference Between Fixed Capital and Working Capital

Fixed Capital

Meaning of Fixed Capital:

Fixed capital is the capital that is used for buying fixed assets that are used for a longer period of time in the business. These assets are not meant for resale.

In simple words, fixed capital refers to capital invested for acquiring fixed assets. It stays in the business for a long period almost permanently.

Examples of fixed capital are – capital used for purchasing land and building, furniture, plant, and machinery, etc. Such capital is required usually at the time of the establishment of a new company. However, existing companies may also need such capital for their expansion and development, replacement of equipment, etc.

Difference Between Fixed Capital and Working Capital

Working Capital

Meaning of Working Capital:

Working capital is the capital that is used to carry out day-to-day business activities. After estimating the fixed capital requirement of the business firm, it is necessary to estimate the amount of capital, that would be needed to ensure the smooth functioning of the business firm. A business firm requires funds to store adequate raw material in stock. A firm would need capital to maintain sufficient stock of finished goods.

A business firm will have to arrange capital for the following :
a) For building up inventories
b) For financing receivables
c) For covering day-to-day operating expenses.

The capital invested in these assets is referred to as ‘Working capital’. The concept of working capital is viewed differently by leading authorities. Some authorities consider working capital as equivalent to an excess of current assets over current liabilities. Gerstenbergh, defines it as, ‘‘The excess of current assets over current liabilities.’’ This approach refers to ‘Net Working Capital’. Gerstenbergh does not call it working capital. He prefers to call it ‘circulating capital’.

Difference Between Owned Capital and Borrowed Capital

PointsFixed CapitalWorking Capital
1) MeaningFixed capital refers to any kind of physical asset i.e. fixed assets.Working capital refers to the sum of current assets.
2) NatureIt stays in the business almost permanently.Working capital is circulating capital. It keeps changing.
3) PurposeIt is invested in fixed assets such as land, building, equipments, etc.Working capital is invested in short term assets such as cash, account receivable, inventory, etc.
4) SourcesFixed capital funding can come
from selling shares, debentures,
bonds, long term loans, etc.
Working capital can be funded
with short term loans, deposits,
trade credit, etc.
5) Objectives of InvestorsInvestors invest money in fixed
capital hoping to make future
Investors invest money in working
capital for getting immediate
6) RiskInvestment in fixed capital implies
more risk.
Investment in working capital is
less risky.

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