“Management of fixed capital involves allocation of firms capital to

1.	“Management of fixed capital involves allocation of firms capital to different long term assets or projects.” By highlighting this statement, you are required to :(i) Identify and explain the various factors influencing the fixed capital requirements of a company, and(ii) State the principles to be followed in managing the fixed assets of a company.
Answer» (i) Fixed Capital: Fixed capital refers to the capital needed for the the acquisition of fixed assets to be used fora longer period. (ii) Factors affecting Fixed Capital (1) Nature of Business : A trading concern needs lower investment in fixed assets compared with a manufacturing organization. (2) Scale of Operations: An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale. (3) Choice of Technique : A capital intensive organisation requires more amount of fixed capital than labour intensive organisations. (4) Technology Upgradation : Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations. (5) Growth Prospects : Higher growth of an organisation generally requires higher investment in fixed assets. (6) Diversification : The firms dealing in number of products (Diversification) requires more investment in fixed capital. (7) Use of Fixed Assets: Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.

“Management of fixed capital involves allocation of firms capital to different long term assets or projects.” By highlighting this statement, you are required to :(i) Identify and explain the various factors influencing the fixed capital requirements of a company, and(ii) State the principles to be followed in managing the fixed assets of a company.

Answer»

(i) Fixed Capital:

Fixed capital refers to the capital needed for the the acquisition of fixed assets to be used fora longer period.

(ii) Factors affecting Fixed Capital

(1) Nature of Business :

A trading concern needs lower investment in fixed assets compared with a manufacturing organization.

(2) Scale of Operations:

An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale.

(3) Choice of Technique :

A capital intensive organisation requires more amount of fixed capital than labour intensive organisations.

(4) Technology Upgradation :

Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations.

(5) Growth Prospects :

Higher growth of an organisation generally requires higher investment in fixed assets.

(6) Diversification :

The firms dealing in number of products (Diversification) requires more investment in fixed capital.

(7) Use of Fixed Assets:

Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.