Difference between Fixed Capital and Working Capital

Each organization or business needs cash to run its business and that is called capital. Normally, capital has two types as one is fixed capital and other is working capital. Fixed capital is the capital invested in getting fixed assets while working capital represents the capital use for daily activities.  According to a layman, types of capital have same meaning however in financial glossary these are diverse in numerous regards. This article will help you to understand the contrast between these terms and help you to remove any ambiguity.

Fixed Capital

Fixed capital alludes to the capital venture done in the long term assets of organization. It is a mandatory prerequisite of a firm amid its beginning stage, i.e. to begin a business or to lead the current business. It is that a portion of aggregate capital, which is not utilized for production but rather they are reserved in business for more than one fiscal year. Its inclination is practically changeless which exist as intangible or tangible assets of organization.

 Working Capital

Working Capital is indicator that measures monetary soundness as well as operational proficiency of the organization. It is the result of current assets less present liabilities. Working capital is utilized to finance everyday business operations. It measures the short term position of the organization. It is needed very frequently to complete the daily basis transactions. Working capital is classified into two types that are gross working capital and net working capital.

Fixed Capital Vs Working Capital

  • Meaning:

Fixed capital alludes to the amount of investment of company in long term assets.

Working capital refers to the capital that is invested into the current assets of the organization.

  • Term:

Fixed capital is the capital which is invested for long terms that means it remains in business for long time period i.e.  For several years

Working capital is the capital which is invested for short term that means it remains in business for short time period i.e. mostly for a year.

  • Liquidity:

Fixed capital assets have low liquidity since they are costly and require extensive asset disposal methods.

Working capital assets usually have more liquidity since they can promptly be changed over into cash.

  • Frequent requirement:

Fixed capital is not needed frequently in business. Its requirement is there when a company needs to do any large investment like spreading out of business or acquiring of more fixed assets.

Working capital is needed frequently in business to complete its daily transactions like buying of raw materials, paying wages and so forth.

  • Source:

The primary source of fixed capital includes debentures, shares and long term loans.

The primary and fundamental source of working capital includes fixed deposits, profits held by company, short term loans, debentures and shares.

  • Quantity:

The fixed capital is needed more in quantity as compare to working capital.

The working capital is needed less in quantity as compare to fixed capital.

  • Scope:

Fixed capital speculations provide strategic targets that mean long term strategies for business. The scope of fixed capital speculations are spread more than a year.

Working capital speculations provide operational targets that mean daily activities of business. Subsequently, a scope of working capital investment is restricted particular for fiscal years or accounting periods.

Conclusion

From the above article we come to know that fixed capital alludes to the amount of investment of company in long term assets while working capital refers to the capital that is invested into the current assets of the organization. Fixed capital is used for long term investments, have low liquidity, required more but less frequent and provide strategic targets whereas working capital is used for short term investments, have high liquidity, required less but more frequent to cover daily operations and provide operational targets. The primary source of fixed capital includes debentures, shares and long term loans whereas primary source of working capital includes fixed deposits, profits held by company, short term loans, debentures and shares.