Question

Manish is engaged in the business of garments manufacturing. Generally, he used to sell his garments in Delhi. Identify the working of your answer. Further Manish wants to expand and diversify has garments business.

Explain any two factors that will affect his fixed capital requirements.

Answer 1

The working capital requirement of Manish will be high as he is engaged in 'manufacturing industry' in which raw material needs to be converted into finished goods before sale.

Factors which will affect his fixed capital requirements are:

(i) Scale of operations

(ii) Growth prospects

(iii) Financial alternatives

(iv) Diversification.

Factors affecting fixed capital requirements are explained below:

(i) Nature of business: A manufacturing concern requires more fixed capital to purchase fixed assets. For example, plant and machinery, etc. as compared to a trading concern.

(ii) Scale of operations: A larger organisation operating at a higher scale needs bigger plant, more space, etc., and therefore requires more fixed capital as compared to the smaller organisations.

(iii) Choice of technique: The business organisations using capital intensive techniques require more fixed capital whereas companies using labour intensive techniques require less capital.

(iv) Technology upgradation: Industries in which technology upgradation is fast need more amount of fixed capital as when new, technology is invented, old machines become obsolete and they need to buy, new plants and machinery whereas companies where technological upgradation is slow they require less fixed capital as they can manage with old machines.

(v) Growth prospects : Companies which are expanding and have high growth plan require more fixed capital, to invest in more plant and machinery and other fixed assets in comparison to the companies having slow growth track or less growth prospects.

(vi) Diversification: Companies which have plans to diversify their business activities by including more range of products require more fixed capital. For producing more products they require more plants and machinery which means more fixed capital is required in comparison to the companies having no diversification plans.

(vii) Level of Collaboration: If companies are preferring collaborations, joint ventures then companies will need less fixed capital as they can share plant and machinery with their collaborations but if company prefers to operate as independent unit then there is more requirement of fixed capital.

(viii) Financing alternatives: Availability of leasing facility reduces the requirement of fixed capital to be invested in outright purchase of the fixed asset.