Explain any six factors affecting the requirement of fixed capital of a company.

Answer – Fixed capital is money invested in long-term assets such as land, buildings, plant and machinery. These assets serve the business for more than one operating cycle.

Factors affecting requirements

• Nature of business: manufacturing generally needs more plant than trading.
• Scale: larger operations generally require greater fixed investment.
• Choice of technique: capital-intensive production uses more machinery than labour-intensive production.
• Technology upgradation: frequent obsolescence creates replacement needs.
• Growth prospects: planned expansion increases future capital requirements.
• Diversification: adding new products may require new facilities.
• Financing alternatives: leasing assets can reduce the immediate purchase requirement, although lease commitments remain.
• Collaboration: sharing facilities can reduce the investment required by each firm.

Fixed-capital decisions should consider long-term needs, risk and the difficulty of reversing an investment.