GODSON PUBLIC SCHOOL

GRADE: XII DATE: 28/01/2022

Business studies

Note: copy down the below given notes in your c/w note neatly

Chapter 9 – Financial Management ( cont…..)

Fixed and Working Capital

a) Fixed Capital:
• Fixed capital is that amount of capital which is incurred in procurement or buying the fixed
assets for a business or an organization. The fixed assets of an organization are those assets
which remain with the business for more than one year.
• For example: Plant and Machinery, land, furniture and fixtures vehicles, etc.

Importance of Management of Capital budgeting/ Fixed Capital

1. Long-term growth: Capital budgeting decisions have long term effects on growth and
profitability of the business in the future.
2. Large amount of funds involved: Capital budgeting decisions involving high amounts of funds
block for a long period of time.
3. Risk involved: Investment in fixed capital and the related financial risks affect the overall
business risk in the long term.
4. Irreversible decisions: The investment decision cannot be reversed without incurring heavy
losses and wasteful expenditure.

Factors affecting the requirement of Fixed Capital

1. Nature of Business: The requirement of fixed capital largely depends upon the type and nature
of the business a company or organization is involved in. Trading requires less fixed capital,
while manufacturing business requires more fixed capital due to the involvement of heavy plant
and machinery.
2. Scale of operations: Larger the business operation, bigger is the investment and lower the level
of business operation smaller is the investment.
3. Choice of Technique: The requirement of fixed capital of an organization largely depends upon
the technique of operation in the organization. An organization that is capital-intensive requires
a huge amount of investment in plant and machinery because it does not rely on manual labour
whereas if an organization is labour-intensive it requires a comparatively less amount of
investment in its fixed assets.
4. Technology Upgradation: The organizations whose assets become obsolete in a very short
duration need to upgrade their technology from time to time which may result in a higher
amount of investment in fixed assets.
5. Growth Prospects: If an organization aspires for higher growth, the investment in fixed assets
should be on a higher side.
6. Diversification: Diversification needs investment in fixed assets. If a jute textile manufacturing
company diversifies into FMCG it requires huge investment.
 7. Financing Alternatives: There are many tools that act as alternatives to huge investment in
assets. For example: Plant and Machinery may be available on a lease and the firm may use the
asset for the required time and pay the rentals thereby reducing huge capital investment.
8. Level of Collaboration: It has become a common practice to collaborate with different
organizations in the industry and use each other’s resources for a common good. For example:
One single ATM machine can be used to withdraw funds from accounts of different banks, this
practice reduces the investment cost at a large scale.
B. Working Capital:
• Working capital is that amount of capital which is used in the day-to-day operations of the
business this may be in cash or cash equivalents. The working capital is utilised by the business
within one year.
• For example: stocks and inventories, debtors, bills receivables, etc.
• Various type of Current assets that contribute to the working capital are:
i. Cash in hand/cash at Bank
ii. Marketable securities
iii. Bills receivable
iv. Debtors
v. Finished goods
vi. Inventory
vii. Work-in-progress
viii. Raw material
ix. Prepaid expenses
• Various sources of Current liabilities that contribute to the working capital are:
a. Bills payable
b. Creditors
c. Outstanding expenses and advances received from customers.

Factors affecting the Working Capital requirements advances from customers.

• Nature of Business: Manufacturing business requires more working capital as compared to

trading business or service provider.
• Business Cycle: During boom period firms require a large amount of working capital to manage
the increased sales and production.
• Seasonal Factors: Seasonal businesses require more working capital during their season time.
• Scale of Operations: Businesses operating on a large scale require larger amounts of working
capital as compared to small business firms.
• Credit Allowed: A business extending a longer credit period to its buyers will need more working
capital as compared to a business doing cash business or offering a lesser credit period.
• Production Cycle: Businesses with longer production cycles require more working capital as
compared to businesses with short-term production cycles.
• Credit Availed: A business organisation receiving longer credit period from their supplier will
require lesser working capital as compared to business purchases goods for cash or receive
short credit period.
• Operating Efficiency: A business operating efficiently is able to convert current assets into cash
easily and thus will require lesser working capital.
• Availability of Raw Material: A business having each and continuous availability of raw material
will not require large stock levels and thus, can manage with lesser working capital.
• Growth Prospects: Firms with high growth rate targets need higher working capital to meet
increased sales target.
• Level of Competition: Tougher competition forces businesses to offer discounts liberal credit
and maintain high levels of stock requiring larger amounts of working capital.
• Inflation: Inflation increases prices as a result firms require large amounts of working capital to
meet the same volume of purchase and operating expenses.