Fixed Capital: It involves allocation of firm's capital in long terms assets. Managing fixed capital is related to investment decision and it is also known as capital budgeting decision. Fixed capital budgeting includes purchase of land, building, plant and machinery, change of technology, expenditure on advertisement campaign, research and development, etc. The requirement of fixed capital depends on various factors such as:
(i) Scale of operations: The companies which are operating at large scale require more fixed capital. For instance, if an organisation operates on a relatively large scale, then its requirement of fixed capital like plants, land or building increases. This is because such firms would need to maintain high stock of inventory for their large scale operations but if an organisation is working on a smaller scale, then the requirement of fixed capital will be less so, it depends upon scale of operation.
(ii) Choice of technique: There are generally two types of techniques that a company can choose for; capital intensive or labour intensive. The choice of these techniques differs from company to company. A company that follows a capital intensive technique would require a larger amount of fixed capital. This is because such a company would require higher investment in plants and machinery rather than in manual labour. In contrast to this, a company following labour intensive techniques would require a relatively lower amount of fixed capital.
(iii) Technology upgradation: Technology plays an important role in the fixed capital requirement of a company. This is because it continuously changes or becomes obsolete over time. Thus, the companies that work with machinery or with equipment that become obsolete faster require a high amount of investment in fixed capital. For instance, equipment such as computers become obsolete much faster, than other assets like furniture and require regular upgradation. In such cases, a higher amount of fixed capital is required.
(iv) Financing alternatives: If leasing facilities are easily available in the financial market, it would provide an easy alternative for the outright purchase of the fixed assets.
That is, the businesses can easily obtain the assets on lease and use them, instead of purchasing them. In this way, the need to invest a huge sum in fixed assets reduces considerably; thereby, reducing the fixed capital requirements.
Thus we can say that requirement of fixed capital depends upon many factors.