Capital is the first word in the book of corporate world because it is the capital which is of paramount importance when one talks about starting a company or managing a company. Fixed capital and working capital are two types of capital and a company requires both types of capitals for the smooth running of the business of the company because both have different objectives and requirement for the company. In order to understand both the terms better let’s look at some of the differences between fixed and working capital –
- The first and foremost difference between the two is that while fixed capital is used for the acquisition of fixed asset like building, furniture, plant and machinery while working capital is used for the maintenance and up keeping of fixed asset.
- Fixed capital investment is strategic in nature because assets like land, building, plant and machinery cannot be purchased at frequent intervals and once these decisions are taken than they are irreversible and that is the reason why such decisions are taken by top management while working capital investments decisions are routine in nature because this type of expenses are done frequently as fixed assets maintenance is required every now and then and that is the reason why such decisions are taken by middle or lower level management.
- In case of fixed capital company can raise funds from various long term source of funds like equity shares, debenture, term loan and so on whereas in case of working capital company can raise funds from bank overdraft, company own cash, creditors and so on.
- The nature of fixed capital is such that it remains fixed in the business for long period of time and that is the reason why they are funded by long term investors whereas nature of working capital is revolving in nature implying that this type of capital keeps rotating in the business and that is the reason why they are funded by creditors or banks on which the company has to pay interest.
- Fixed capital is often used for production of other goods and services while working capital is often used for acquiring raw material for production, maintenance of machinery and other such activities implying that working capital is used for smooth functioning of fixed capital investments and they are not directly but indirectly helpful in the production of goods and services.
As one can see from the above that though both fixed and working capital are different from each other but as far as the company is concerned they both complement each other in the smooth functioning of the company.