Every business needs capital. Capital is required at the time of starting a business. it is also needs when the business is in operation. As an enterprise requirements for business is classified under two main needs.
(a) Fixed capital
(b) Working capital
(a) Fixed capital
No business can be started without an adequate amount of fixed capital fixed capital as the name signifies are necessary for conducting the operation of a business. these fixed assets are land, building machinery, equipment. the fixed assets normally do not change their from and cannot be withdrawn from the business at a short notice. they can, however, be disposed of. Fixed capital thus are the funds required for the purchase of those assets that are to be used over and over for a long period such as land, building, machinery, etc.
investments in non current assets such as goodwill, patent rights, copyright, long term receivables etc also from a part of fixed assets. the amount of capital required for investment in fixed assets varies with the nature of a business, size of business unit and technique of production. large scale industries, like railways, oil drilling, operations, hydro and thermal electricity project etc. require more fixed capital, "Summing up fixed capital comprises of fixed assets and other non-current assets.
Importance of fixed capital. The importance of fixed capital can be judged from the fact that a business cannot be made aperative without it. right from the very beginning i.e. conceiving an idea of business, purchase of land, construction of building, purchase of machinery etc. capital is needed. further, for have an adequate amount of fixed capital in an enterprise.
(b) Working capital
In Balance sheet terms, working capital is the difference between current assets and current liabilities of a business. current asses are those assets, which in the ordinary cours of business, can be converted into cash within a short period of normally one accounting year. Current assets include cash in hand and bank balances, bills receivable, short term investments, inventories of stocks. while current liabilities are those which are intended to be paid withen a short period of one acountng year out of the current assets. the current liabilities include bills payable, short term loans, bank overdraft, dividends payable, taxes payable etc.
Working capital also called circulating capital is the life blood and nerve centre of a business. working capital is mostly used for the purchase of new material, payment of wages and bill, seasonal urgent demands of the business, purchase of more goods for sale, meeting the expenses of advertising, providing credit facilities to the customers etc. etc.
Example: Current assets - Current liabilities = Working capital
Rs. 1.50 Crore - 1.30 Crore = 20 lakhs
The difference between the current assets and current liabilities is surplus, then business has a positive working negative or deficient working capital.
Importance of working capital
The advantages of working capital in brief are as under:--
(1) Solvency of business. if helps in Solvency of business. the
flow of production remains uninterrupted.
(2) Good will. The entrepreneur is able to pay wages to the workers and other bills in time. this helps in creating goodwill of business.
(3) Loans on favourable terms. A business with high solvency and greater goodwill can easily obtain loans from bank.
(4) Cash discounts. A business with adequate working capital
can obtain cash discounts on the purchase. this helps in reducing
cost.
(5) Enables to face crisis. An adequate working capital enables
an enterprise to face business crisis.
(6) Regular payment of dividend. A sufficient amout of working capital enables a business to earn profit and pay
dividend to investors in time.
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