Distinction between Fixed Capital and Working Capital

The capital invested in fixed assets is always referred to as fixed capital. The capital invested in the current assets is termed current capital. The primary distinction between fixed and current capital are constantly changing in form. According to Jain (1999), there are two points of differences between fixed capital (fixed assets) and current capital (current assets). These are:

• The first difference is the durability of their economic life. As stated earlier, fixed assets (fixed capital) last for more than one year. Moreover, they are not convertible into cash within one year. 
• The second difference is regarding divisibility. Investment in current assets is easily divisible than investment in fixed assets. 

Investment in fixed assets enhances the future earning capacity and improves the growth prospects of the business investments, it is important to ascertain the feasibility of the project and to evaluate its benefits.

SELF-ASSESSMENT EXERCISE 4

• Differentiate between fixed capital and working capital. 

CONCLUSION

Our discussions reveal that the two types of capital (fixed and circulated or working) are quite vital to any business concern. Hence, entrepreneurs or managers of enterprises ought to be involved in the management of different types of capital. Businesspersons should also ascertain the various factors affecting their enterprises particularly, working capital, the classification of working capital, and their relevance to their enterprises. This will assist them to decide which division, project or acquisition gets a particular type of capital. This will go a long way in propelling the wheels of the enterprise.

SUMMARY

The unit has shed more light on the types of capital. Management of fixed capital was discussed meaning and classification of working capital along with factors affecting working capital requirements were also discussed. Finally, we examined the distinction between fixed capital and working capital. In the next study unit, we will take you through the measurement of capital.

TUTOR – MARKED ASSIGNMENT

• Identify and explain the objectives of fixed capital management
• Mention and discuss the various conditions affecting working capital requirements in the Nigerian manufacturing industries.