Every business needs capital (funds) to run. This capital is of two main kinds ā fixed capital and working capital. Fixed capital is the money invested in long-term, fixed assets such as land, buildings, machinery and furniture, which are used in the business for many years. Working capital is the money needed for the day-to-day running of the business, such as buying raw materials, paying wages and meeting daily expenses. Understanding the difference between the two is important in business finance.
A business needs two kinds of capital: fixed capital and working capital.
Fixed capital is invested in long-term fixed assets like land, building and machinery.
Working capital is used for day-to-day operations like raw materials and wages.
Working capital = Current assets ā Current liabilities.
Fixed capital is required for a long period; working capital for a short period.
Fixed capital stays invested for years; working capital keeps circulating.
Working capital is easily converted into cash; fixed capital is not.
Fixed capital is the part of the total capital that is invested in fixed (long-term) assets of the business.
Features: ā¢ It is used to buy assets that last for many years. ā¢ Examples of such assets: land, buildings, plant and machinery, furniture, vehicles. ā¢ These assets are not meant for resale; they are used to produce goods and services. ā¢ Fixed capital is required mainly when a business is started or expanded. ā¢ It stays invested in the business for a long period.
Example: The money a factory spends on its building and machines is fixed capital.
Working capital is the part of the total capital that is used for the day-to-day operations of the business. In simple terms: Working capital = Current assets ā Current liabilities.
Features: ā¢ It is used for short-term needs and recurring expenses. ā¢ Examples of uses: buying raw materials, paying wages and salaries, paying for electricity, holding stock and meeting daily expenses. ā¢ It keeps circulating in the business (cash ā stock ā sales ā cash). ā¢ It is needed continuously to keep the business running smoothly.
Example: The money used to buy raw materials and pay workers every month is working capital.
Fixed Capital: ā¢ Invested in fixed (long-term) assets ā¢ Used for buying land, building, machinery, etc. ā¢ Required for a long period ā¢ Needed mainly at the time of starting or expanding the business ā¢ Stays in the business for many years ā¢ Not easily converted into cash
Working Capital: ā¢ Invested in current assets ā¢ Used for day-to-day expenses like raw materials and wages ā¢ Required for a short period ā¢ Needed continuously for daily operations ā¢ Keeps circulating in the business ā¢ Easily converted into cash
In short, fixed capital is for long-term assets, while working capital is for daily running of the business.
Fixed capital is the money invested in long-term fixed assets such as land, buildings, machinery and furniture, which are used in the business for many years. Working capital is the money used for the day-to-day running of the business, such as buying raw materials and paying wages. Fixed capital is needed for a long period and is not easily converted into cash, while working capital is needed continuously and keeps circulating.
Fixed capital is the part of a business's capital that is invested in fixed (long-term) assets like land, buildings, plant and machinery, furniture and vehicles. These assets are used to run the business for many years and are not meant for resale. Fixed capital is mainly required when a business is started or expanded.
Working capital is the part of capital used for the day-to-day operations of a business, such as buying raw materials, paying wages and meeting daily expenses. It is calculated as current assets minus current liabilities, and it keeps circulating in the business through the cycle of cash ā stock ā sales ā cash.
If a company spends money on building a factory and buying machines, that money is fixed capital because it is invested in long-term assets. If the same company spends money each month on raw materials, electricity and workers' wages, that money is working capital because it is used for daily operations.
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