Difference Between Working Capital and Fixed Capital

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 their funds they do so by taking into consideration several things like their 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.

Working Capital vs Fixed Capital

The main difference between working capital and fixed capital is that working capital is required for the short term and money that is generated is used to buy current assets, on the other hand, the fixed capital is required for the long term and the money generated is used to buy fixed assets.

Working Capital vs Fixed Capital

The difference between a company’s present assets and liabilities is known as 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 the capital that is used by a company to produce a certain product repeatedly is known as a fixed asset. The concept of fixed capital was first tossed in the year 1776 by Adam Smith who was 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 Between Worling Capital and Fixed Capital

Parameters Of ComparisonWorking CapitalFixed Capital
Meaning/ DefinitionThe 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.
ApplicationWorking 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.
LiquidityMoreLess
ObjectiveBy using working capital a company serves and fulfils its operational objectives. By using fixed capital a company serves and fulfils its strategic objectives.
Raised throughShares, banks, trade credit etc.Term loans, shares, debentures etc.

What is Working Capital?

Working capital is the money that is saved and earned by a company that is used for carrying out 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.

For calculating the net working capital of a company, a simple method is used. 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 if the result obtained are less than one then the company has a negative working capital. If a company has a positive net working capital then the company is capable of providing funds and capital for their future investments, activities and overall growth.

An acceptable and profitable net working capital is the one that is on the edge or more than the company average in comparison with the size of the company. The company has lesser chances 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 fulfilment of the strategic objectives of the company. For larger investments, fixed capital is most often 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. The fixed assets of a company 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, 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 perpetual inventory manner. The company, however, makes efforts for calculating its fixed capital by directly measuring it and making surveys of the records. These records include business records, assessment records of the taxes, fluctuation in the prices etc.

Main Differences Between Working Capital and Fixed Capital

  1. 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.
  2. 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.
  3. The working capital is comparativelys more liquid, on the other hand, the fixed capital is comparatively less liquid.
  4. The objective of using working capital is to fulfil and serve the company’s operational objectives, on the other hand, the objective of using fixed capital is to fulfil and serve the company’s strategic objectives.
  5. The source of working capital is trade credit, shares etc, on the other hand, the source of fixed capital is term loans, debentures etc.

Conclusion

Both working capital and fixed capital are of great use for a company to buy assets for both the short term as well as long term. They help the company grow in a way or another by helping it buy both types of assets.

Maintaining a positive working capital and fixed capital is extremely important. A company has a greater risk of facing losses in their business if their working and fixed capital.is on the negative side. If a company wants to gain profit in their business it must stay on the edge ore have positive working as well as fixed capital.

References

  1. https://www.emerald.com/insight/content/doi/10.1108/19355181200500007/full/html
  2. https://www.jstor.org/stable/1815693
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