What are factors determining fixed capital requirements in business?

What are factors determining fixed capital requirements in business?

Ans:   The factors determining or influencing fixed capital requirements are as follows

1.      Nature of business:

The requirement of fixed capital to be invested differs from industry to industry. The manufacturing enterprises require larger proportion of fixed capital in the form of land, building, plant, machinery, furniture etc. which are required for carrying out manufacturing activities. Public utility concerns like railways, require a larger fixed capital for purchase of land, laying of track, buying rolling stock, railway stations, workshop etc. Concerns engaged in rendering personal services, merchandise, trade or commerce usually require comparatively much lesser fixed capital.

2.      Types of Products:

The type of products produced is also one of the important factors of fixed capital. If a standard product is to be produced with standard men, machines and materials, larger amount of fixed capital would be required. Manufacturing of technical types of goods or capital goods require larger amount of fixed capital as compared to consumer goods.

3.      Size of the firms:

The size of the firms influences the quantum of fixed capital. The bigger the size of the plant, the larger would be the fixed investment. A smaller sized firm with limited scale of operations would require lesser fixed capital.

4.      Diversity of production lines:

This is also one of the important factors which govern the fixed capital requirements. If a concern is engaged in manufacturing and marketing, then it requires larger fixed capital. If its business is merely to procure the already manufactured goods and to market them, much less fixed capital would be required.

5.      Method of handling production:

This factor also influences the amount of its fixed capital. If the firm is engaged in assembling the parts manufactured by other industries, its fixed capital requirements will be lesser compared to the firm which integrates all the sequences of manufacturing activities.

6.      Method of acquiring the fixed assets:

Larger fixed capital is required for purchasing land, constructing building, acquiring plant and machinery on ownership basis. If the land and building are taken on rental basis or if plant is acquired on lease, then naturally lesser amount of fixed capital would be required.

7.      Technique of production:

The technique of production also affects the amount of fixed capital. A firm using capital-intensive techniques requires more fixed capital than another firm of the same size using labour-intensive technology. Shifts in technology lead to changes in the amount of fixed capital.

8.      Type of the industry:

Due to the inherent nature of some industries, any company belonging to such industries cannot be started on a small scale business. Hence, the fixed capital requirement is more. Petrochemicals, oil exploration, mining, automobile etc. cannot be started on a small scale business.

9.      Government subsidy:

The Government of India offers various incentives in the form of subsidies for an organisation to start its activities in backward areas. So if the organisation starts the activities in backward areas, the amount of fixed capital required is less as certain assets like land are made available at subsidised rates.

10.    Subcontracting facility:

If the company decides to sub-contract some of its production activities, it may require lesser fixed capital e.g. if the company hands over the grinding work to some outside agency, it may not be necessary for it to invest in assets like grinding machines, as a result of which, the fixed capital . requirement would be less.