Question

Attempt the following
What are the factors affecting requirement of fixed capital?

Answer 1

Factors affecting requirement of fixed capital :
(i) Nature of Business - The nature of business plays a vital role in determining fixed capital requirement. The big business enterprises providing public utility services, manufacturer and industrial enterprise need large fixed investments. On the other hand, trading concerns require less fixed capital as they do not need large funds for land, building, plants and machinery.
(ii) Size of Business - Larger the size of business, higher is the need of fixed capital. Hence, size of a firm either in terms of its assets and scale of operations affects the fixed capital requirements.
(iii) Growth and Expansion - In order to manage growing production and turnover, a firm with higher growth prospects will require large amount of fixed capital.
(iv) Stage of Development of Business - The requirement of fixed capital for a new established organisation is more than that of an existing or established organisation.
v) Business Cycle - Where there is boom period in an economy. the organisation needs to invest more in fixed assets so as to increase its production capacity. However, in recession the organisation avoids huge projects. and hence, it may not require more of Fixed Capital.