Fixed capital

Fixed capital is money invested in long-term assets: plant, machinery, land, buildings, vehicles. Because these assets are used for many years, fixed capital must be financed from long-term sources, never from short-term ones.

Why fixed capital decisions matter: they affect the firm's long-term growth; they involve a large amount of funds; they carry risk; and they are hard to reverse.

Factors that decide how much fixed capital a business needs:

• Nature of business: a manufacturer needs plant and machinery; a trading firm needs far less.
• Scale of operations: bigger firms need more.
• Choice of technique: a capital-intensive firm (using machines) needs more than a labour-intensive one.
• Technology upgradation: assets that become obsolete quickly, like computers, must be replaced more often than, say, furniture.
• Growth prospects: a growing firm needs more capacity.
• Diversification into new products needs new assets.
• Financing alternatives: leasing an asset instead of buying it reduces the fixed capital needed.
• Level of collaboration: sharing facilities, as banks share ATMs, reduces it too.