Every organization requires money to carry on the business activities and the money required by the organization is termed as CAPITAL. The capital is mainly divided into two types
1. Fixed Capital
2. Working Capital.
The modern finance manager has to take decisions to efficiently allocate the fixed capital and working capital among the investments of fixed assets and current assets to ensure the smooth running
of the organization in the long run.
The words of H. G. Guthmann clearly explain the importance of working capital. “Working Capital is the lifeblood and nerve center of the business.”
In the words of Walker, “A firm’s profitability is determined in part by the way its working capital is managed.”
Fixed capital refers to the funds invested in fixed or permanent assets as land, building, and machinery etc by the organization.Fixed capital is required for establishment of business. Fixed capital invested in the long term assets is very important since it determines the value of firm through the growth, profitability, and risk. Fixed capital also refers to investment in intangible assets like copyrights, patents, goodwill, organization.
working capital refers to the funds which are invested in materials, work in progress, finished goods, receivables, and cash etc. Working capital is required to utilize fixed assets of the company. Working capital plays a key role in a business enterprise. The efficiency of the business enterprise largely depends on its ability to manage its working capital. Working Capital is concerned with the management of firm’s current assets and current liabilities.
There exist numerous differences between Fixed Capital and Working Capital, some of them are as follows.
FIXED CAPITALWORKING CAPITALFixed capital may be defined as capital invested in long-term assets.Working capital may be defined as capital invested in current assets RequirementFixed capital is required for establishment of business.Working capital is required to utilize fixed assets of the company. Sources of FundsThe industrial units mobilize fixed capital from various sources like shares, debentures, banks etc. which are to be repaid over long time period.The industrial units mobilize working capital from the commercial bank loans, profits retained, etc. which are repayable before one year. ConversionThe fixed capital which is used for fixed assets is not easily convertible into cash.The working capital investments have high liquidity and can be easily convertible into cash. NatureFixed capital is a one-time investment to purchase fixed assets for starting a business or for expanding a business.Working capital is required constantly for day to day business activities of the organization. DurationFixed capital in long-term investment i.e it is invested at the for long periods of time.Working capital is usually a short term investment for running of businesses day to day operations. ReturnsFixed capital aims at long-term return to the organization.Working capital is generally focused on meeting the daily requirements for operational activities of the organization. Amount RequiredFixed capital constitute a very large amount of investments done by the organization.Working capital required is considerably less in amount when compared to Fixed Capital of the organization. AssetsFixed capital invested in long-term fixed assets is studied under “Capital Budgeting”.Working capital invested in current assets is studied under “Working Capital Management”.