Difference between Fixed Capital and Working Capital

Organizations have various assets and liabilities through which the profit and loss statement is determined. The profit and loss of the company depends upon the annual sales, profits earned, losses incurred, etc. Assets are a significant part of an organization. The shareholders invest in the company's assets so that they can earn profits from it. The shareholders not only share the profits but losses as well.

Now, there are two kinds of capital in an organization, i.e., fixed capital and working capital. As the name suggests, fixed capital is the one in which the investors invest in the assets. On the other hand, working capital is the one that is used in day-to-day operations. There are other aspects of fixed capital and working capital. So, let us have a look at them.

Fixed Capital

Fixed capital is defined as the capital wherein the shareholders invest in the long-term assets of the organization. In layman's terms, fixed capital is the money invested in physical assets like factories, machinery, vehicles, etc. These are the long-term assets that permanently stay in business (more than one accounting period). Raw material, expenses, and several other things are included in it. One of the common examples of fixed capital is property. People invest in buying properties because it is a fixed and a long-term asset. Another example of this can be plants and equipment.

Now, why is fixed capital important? Well, fixed capital plays an integral role in building/ establishing a business enterprise. Physical assets are used for expanding the business and also improving it. Assets are considered to be a prerequisite for businesses. Some of the significant sources of fixed capital are the issue of equity, preference shares, private placement of shares, lease financing, term loans, issue of debentures, etc.

Some of the features of fixed capital include that it is permanent in nature, it cannot be withdrawn, etc. Fixed capital can only be withdrawn when the business closes due to some reason. Thus, fixed capital is one of the capitals that have a long-lasting existence.

Working Capital

Working capital is defined as the capital that the organization utilizes in its day-to-day operations. Working capital is used to measure the efficiency of the company and its financial health. The formula for working capital is as follows:

*Working Capital = Current Assets - Current Liabilities*

Some of the examples of working capital include treasury bills, money market funds, stocks, bonds, mutual funds, etc. Working capital is important because it is used to pay short-term obligations like buying inventory, payable accounts.

Working capital is a significant part of the operating capital in business organizations. Some of the factors that affect the working capital are the nature of the business, seasonal factors, the scale of operation, length of the operating cycle, the credit allowed, and credit availed. These factors highly affect the working capital of the business. Now, one of the major advantages of working capital is that the company has more flexibility that helps the company in satisfying their clients. Business expansion and investing in services and goods are also some of the pros of working capital.

Now, there are certain differences between fixed capital and working capital. So, let us have a look at them.

So, these are some of the contrasting points regarding fixed capital and working capital. Both fixed and working capitals are essential for business expansion and client satisfaction. Both these capitals help in the growth of the company. Thus, fixed capital, as well as working capital, plays a significant role in establishing business organizations.