Question

Explain the following term/concept: Fixed Capital

Hint:

Think of fixed capital as the foundation of a house. It's the permanent structure (the factory, the machines) that allows the business to function and produce. It's durable and not easily converted into cash.

Answer 1

Meaning: Fixed Capital is the sum of money invested in acquiring or upgrading long-term, tangible assets known as fixed assets. These assets are not meant for resale but are used by the business over a long period (typically more than one year) to generate revenue. They form the operational base of a company. Examples of Fixed Assets:

Land and Buildings
Plant and Machinery
Furniture and Fixtures
Vehicles
Computer Equipment and Software
Factors Affecting Fixed Capital Requirement: The amount of fixed capital a business needs depends on several factors, including the nature of the business (a manufacturing company needs more than a trading company), the scale of operations, and the technology used. Funds for fixed capital are usually raised from long-term sources like issuing shares, debentures, and securing long-term bank loans.