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Factors Affecting Fixed Capital

Heavy expenditure is involved in purchasing fixed assets like land and building, plant and machinery, etc. However, the actual requirement of fixed capital vary from business to business. these are determined by the following factors:

(i)    Nature of Business. Trading enterprises require smaller amount of fixed capital as compared with the industrial enterprises in general. Further, industrial units using complex production processes would require more fixed capital than unit using simple production processes which are labour oriented.

(ii)    Scale of operations. A large scale enterprise generally required more fixed capital than a small scale enterprise. For instance, public utility concerns like railways and electric supply companies require huge investments in fixed assets.

(iii)    Type of Manufacturing Process. Service and assembly industries require a much smaller of fixed capital than what is required in analytical processing synthetically processing industries. If an industry is highly mechanized its investment in the form of fixed capital will be higher than the industries having less degree of mechanization.

(iv)    Degree of Automation. Industrial units using automatic plants require more fixed capital as compared to the units using labour intensive techniques of production.

(v)    Mode of Acquiring Fixed Assets. Fixed assets can be purchased outright or on the basis of installment payment. In the former case, the requirement of fixed capital will be very high.

(vi)    Distribution policy. The firm which sells its products through wholesales and retailers requires less fixed capital. but if a firm decides to distribute its products directly to the customers, it would require higher fixed investment in opening retail outlasts.

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