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Difference between Fixed Capital and Working Capital

April 5, 2021 Comments Off on Difference between Fixed Capital and Working Capital

For a business to run efficiently a businessman needs to invest capital in the company. this capital is further bifurcated into two different parts. These are Fixed capital and Working Capital. Both Fixed Capital and Working capital need to be present in a company. Moreover, the management should try to keep a balance between the two. a perfect balance between the two will help the business to generate more revenue as well as ensure the smooth working of the business.

The definitions of the two types of capital as well as the difference between both are given below.

What is Fixed Capital?

Fixed Capital comprises funds that are invested for the generation and creation of assets for the long term. These are spending which cannot be avoided and are a constant factor in the business. this type of capital is perpetual in nature and is used for the acquisition of tangible (building other infrastructure) and intangible (Goodwill, Intellectual Property, etc.). The total Fixed Capital can be found out using the Accounting Process.

What is Working Capital?

In layman terms, Working Capital is the capital that is not kept for the long term and is used for the day to day business activities of the business. the working capital comprises current assets which can be transformed into liquid within one year. This will include financial instruments such as cash, debtors, inventories etc. It also includes liabilities such as short term loans, tax provisions, creditors etc.

Difference between Fixed Capital and Working Capital

There are distinct differences between the working capital of a business and the Fixed Capital of a business. this difference is given below:

Basis Fixed Capital Working Capital
Definition Fixed Capital refers to the investments made by the management of the company to acquire long term assets for the business or to aid business activities. The working capital is the capital of the business that is invested in order to acquire the assets of the company for the short term. This type of capital is required for conducting the day to day business activities of the company.
Asset Acquired These are usually the non-current assets of the company There are the current assets of the company and are used on a daily basis.
Liquidity This is not liquid meaning that it cannot be used to make a quick buck. Most of the working capital can be turned into liquid cash very quickly.
Time Frame The Fixed Capital comprises those assets which may not be possible to turn into cash. Even if possible it may turn into cash after one year. The Working Capital comprises assets that can be turned into cash within a year.
Objective The Fixed Cash can assist in the formation of plans for the future as well as it assists in the development of the infrastructure of the company. Working Capital assists the company in conducting the day to day activities of the business.

 

These are some of the differences between Fixed Capital and Working Capital. It is very important that the management of a company understands the difference and maintains a balance between the two.

If the ratio between Fixed Capital and Working Capital is even a little off, the company may have to face the music. Any discrepancy in the capital ratio will lead to huge problems for the company and can even cause the company to liquidate.

To prevent any such thing to happen, the management of a company should always take the assistance of a financial consultancy which will help the business to avoid any such penalties and will also assist in the development of the business.

If you are looking for such financial consultancy in the United Arab Emirates, then you should have a look at the services provided by JAXA Chartered Accountants. JAXA is a reputed financial consultancy in the UAE and will assist a business to make the best of the business environment

They also provide various other services such as Accounting Services, Auditing Services, Services related to Economic Substance Regulation (ESR) etc. For any more assistance on the services provided by JAXA, feel free to Contact Us. We will be happy to help.