Today, there exist several concepts in investment and banking. These concepts entail various procedures that are involved whenever we invest in schemes.
Whenever a company invests its funds, they do so by taking into consideration several things like its current assets, previous losses and/ or profits, market value, face value, etc.
These things are kept in a record which helps the company to make further decisions. Two of those things are 1. Working capital, and 2. Fixed capital.
Key Takeaways
- Working capital funds a business’s daily operations, such as paying bills and covering short-term expenses.
- Fixed capital supports long-term investments like machinery, buildings, and equipment.
- Both types of capital are crucial for a company’s growth and stability but serve different purposes.
Working Capital vs Fixed Capital
Working capital is a financial measure of a company’s operational liquidity, calculated as current assets minus current liabilities, crucial for day-to-day operations. Fixed capital refers to the long-term tangible assets of a company, like machinery and buildings, used in the production of goods and services.
The difference between a company’s assets and liabilities is the working capital. It is also addressed as net working capital.
The ratio of the company’s present assets and liabilities must be in the sink and proportion. If the ratio is negative, then the company has a negative working capital.
The money or capital a company uses to produce a certain product repeatedly is known as a fixed asset. The concept of fixed capital was first tossed in 1776 by Adam Smith, an economist.
The fixed assets of a company are never used completely in one go they are used bit by bit for the production of goods.
Comparison Table
| Parameters Of Comparison | Working Capital | Fixed Capital |
|---|---|---|
| Meaning/ Definition | The difference between a company’s present assets and liabilities is known as the working capital. | The money or the capital that is used by a company to produce a certain product repeatedly is known as a fixed asset. |
| Application | Working capital is the money that is used for carrying out various daily business activities. | Fixed capital is the money that is used for buying assets that are fixed and are used for a longer period in the company. |
| Liquidity | More | Less |
| Objective | By using working capital a company serves and fulfils its operational objectives. | By using fixed capital a company serves and fulfils its strategic objectives. |
| Raised through | Shares, banks, trade credit etc. | Term loans, shares, debentures etc. |
What is Working Capital?
Working capital is the money saved and earned by a company that is used for daily short activities relevant to the company’s business. It is capital that is used for short-term expenditure that mostly deals with fulfilling operational objectives.
A simple method is used to calculate a company’s net working capital. The formed net working capital is subtracted from the latter net working capital.
The standard method for calculating the net working capital is to subtract current assets from current liabilities.
By dividing the current assets by current liabilities, the company has a negative working capital if the result obtained is less than one.
If a company has a positive net working capital, it can provide funds and capital for its future investments, activities, and overall growth.
An acceptable and profitable net working capital is one that is on edge or more than the company average in comparison with the size of the company.
The company has a lesser chance of facing losses if that is the case. If the company has negative net working capital, then the company has greater chances of having losses.
What is Fixed Capital?
Fixed capital is the money or the capital that is saved and earned by the company to buy fixed assets and assets that are bought for long-term usage.
This expenditure leads to the fulfillment of the strategic objectives of the company. For larger investments, fixed capital is most used.
In the year 1776, the economist Adam Smith tossed the concept of fixed capital for the first time. Later on, in the year 1821, David Ricardo also explained the concept of fixed capital.
A company’s fixed assets are the larger and more important investments a company has to make.
For making larger investments like buying land, improving and maintaining the land quality, buying vehicles and equipment for carrying out various processes depending on the nature of the company, buying properties, etc., a company has to have a fixed capital.
The fixed capital ensures that the company can make expenses for the makntainenece and other bigger assets.
The methods of calculating the fixed capital of a company include measurement of the capital directly and/ or calculations done in a perpetual inventory manner.
The company, however, makes efforts to calculate its fixed capital by directly measuring it and making surveys of the records. These records include business records, assessment records of taxes, fluctuation in prices, etc.
Main Differences Between Working Capital and Fixed Capital
- Working capital is the money that is saved and/ or earned by a company for smaller expenses that are incurred frequently, on the other hand, fixed capital is the money that is saved and/or earned by a company for bigger expenses than are incurred less frequently for buying fixed assets.
- The assets bought by using working capital by a company are of short-term usage, on the other hand, the assets bought by a company by using fixed capital are of long-term usage.
- The working capital is comparatively more liquid, on the other hand, the fixed capital is comparatively less liquid.
- The objective of using working capital is to fulfill and serve the company’s operational objectives, on the other hand, the objective of using fixed capital is to fulfill and serve the company’s strategic objectives.
- The source of working capital is trade credit, shares, etc, on the other hand, the source of fixed capital is term loans, debentures, etc.
- https://www.emerald.com/insight/content/doi/10.1108/19355181200500007/full/html
- https://www.jstor.org/stable/1815693
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The post contains some useful information, but I feel that the language used is a bit too technical for the average reader. It would be helpful to include some real-world examples to make the concepts easier to grasp.
This is an interesting post. It explains the differences between working capital and fixed capital in a clear and concise manner. I think this information will be very helpful to anyone who is interested in the topic.
The post does a great job of explaining the importance of working capital and fixed capital in a company’s operations. The comparison table was particularly helpful as it makes it easier to understand the key differences.
This post is a great starting point for anyone looking to learn about working capital and fixed capital. The explanation is clear and the information is well-organized.
I find it amusing that the concept of fixed capital was first introduced in 1776. It’s interesting to see how these concepts have evolved over time.
I don’t agree. I found the explanation to be a bit confusing. Even though I understand the difference between working capital and fixed capital, I believe the post could have been more detailed.