Difference Between Fixed Capital And Working Capital

Capital investments are like fuel to any business which helps them function and run daily operations smoothly. Capital is needed to procure fixed assets that allow any business to complete the service. There are two types of capital necessary for business, fixed capital, and working capital. The key difference between both is that fixed capital is used to procure fixed assets such as buildings, warehouses, machinery, transportation, etc and working capital is used to operate day-to-day operations and expenses. This article will delve into understanding the difference between fixed capital and working capital with examples.

What is Fixed Capital?

Fixed capital is the money or funds used in a business to procure fixed assets. It is a long-term investment that supports the business in the long run. Fixed capital is used to buy permanent assets such as buildings, office space, machinery, transportation, etc. It is important for any business’s success, as it allows the company to improve productivity, enhance service quality, and grow its business. Tangible assets such as vehicles, machinery, equipment, and even rented office space are some examples of fixed assets.

What is Working Capital?

Working capital is the money required by any business to run day-to-day functions. It is capital invested in the current assets of a business. It is an approximate fund available to run the business and represented as a value that comes after subtracting current liabilities from the current assets.

Here, current assets are those which can be liquefied within a year. Cash in hand, debtors, and inventories are examples of current assets. In contrast, current liabilities include short-term loans, bank overdrafts, tax provisions, creditors, etc. Hence, working capital is the funds required by a business/organization to meet short-term goals.

Difference Between Fixed Capital and Working Capital

• Fixed capital is used to purchase assets expected to last more than one year, such as machinery, equipment, and buildings. Working capital is used to purchase assets expected to last less than one year (such as inventory).
• Fixed capital indirectly supports the business, whereas working capital directly supports the business. For example, suppose you’re selling clothing online and want your inventory to be on hand when it’s needed. In that case, having a warehouse full of clothes could help with this goal—the cost incurred to set up a warehouse is fixed capital. Whereas working capital is required to purchase raw materials, pay wages to employees, and for marketing and selling activities.
• Fixed capital is invested in long-term assets, and working capital is invested in current assets, which can be converted into cash in a year.
• Fixed capital is required in the initial phase of the business or before the business starts. Working capital is needed to run the company after it gets started.
• Fixed capital cannot be liquidated into cash immediately. Working capital can be converted into cash immediately when needed.
• Fixed capital serves the business for long-term gain, whereas working capital is used for short-term business goals.
• Fixed capital is utilized strategically, and working capital is primarily used for operational purposes.
• Fixed capital and working capital are two terms that represent the funds or money used in a business.
• Fixed assets should increase the value of your business over time by allowing it to produce more efficiently or better meet customers’ needs. 

Advantages of Fixed Capital and Working Capital

Fixed Capital –

• Long-Term Stability:

• Fixed capital investments, such as machinery, buildings, and equipment, provide long-term benefits and stability for a business.
• These assets are not easily liquidated, which helps ensure the business remains operational and productive over time.

• Enhanced Production Capacity:

• Investing in fixed capital increases a company’s production capabilities.
• Higher production capacity can lead to economies of scale, reducing costs per unit and increasing profitability.

• Increased Efficiency:

• Modern machinery and technology improve operational efficiency.
• Automated processes and advanced equipment reduce manual labor and errors, leading to higher quality and output.

Working Capital –

• Ensures Liquidity:

• Adequate working capital ensures the business can meet its short-term obligations, such as paying bills and salaries.
• It helps maintain smooth operations without disruptions.

• Operational Efficiency:

• Sufficient working capital allows the business to purchase inventory and raw materials as needed.
• This prevents production delays and ensures timely delivery to customers.

• Improves Creditworthiness:

• Positive working capital indicates financial health, making it easier to secure loans and favourable credit terms from suppliers.
• It builds trust with creditors and investors.

Conclusion

Fixed capital and working capital are necessary to start and run a business smoothly. It’s not possible to start a business without fixed capital and operate it without working capital. Hence, special care needs to be taken when investing in these two in the business. Working capital is essential to utilize fixed assets in any industry. Many micro, small and medium enterprises (MSMEs) face difficulty managing their working capital for various reasons (delayed payment, abiding credit terms, etc.).
To overcome these challenges, Mynd Fintech has introduced Vendor Finance to MSMEs. Now, MSMEs don’t need to wait for the credit period to get over to get payment; they can raise locked-in receivables early on confirmed invoices and improve their cash cycle. Additionally, they can expand their business on mGlobalTrade, a secure and transparent B2B marketplace that helps small, micro, and medium enterprises to connect with buyers, wholesalers, suppliers, and manufacturers.