Question

You are the Financial Manager of a newly established company. The Directors have asked you to determine the amount of Fixed capital requirement for the company.

Explain any four factors that you will consider while determining the Fixed capital requirement for the company?

Answer 1

The requirement of fixed capital depends upon various factors which are explained below:

1. Nature of Business:

The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as trading company does not need plant, machinery, etc.

2. Scale of Operation:

The companies which are operating at large scale require more fixed capital as they need more machineries and other assets whereas small scale enterprises need less amount of fixed capital.

3. Technique of Production:

Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery.

4. Technology Up-gradation:

Industries in which technology up-gradation 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 up-gradation is slow they require less fixed capital as they can manage with old machines.