Difference Between Fixed Capital And Working Capital And Certain Facts You Need To Know About These Types
Every company needs a certain amount of capital for it to thrive or start. Capital is nothing but a certain amount of money that needs to be put into the business for it to be run. So there are broadly two types of capital: fixed and working capital.
Fixed capital is the capital that is not tradable by the company or business. It is the fixed amount that is set aside for the fundamental necessity of the company or business. For example, if the owner of the company owns the land, the business is conducted on, that is fixed capital because it is blocked and cannot be spent. However, this does not mean that it is of no value because, without it, the business cannot be conducted. Similarly, machines owned by the company also follow the same principle, since work cannot be done without them.
Working capital, on the other hand, is the liquid money in the company. It involves the money that can be spent by the company and is used for running the company or business. This includes capital like the salary payable to the employees, short term expenses of the company etc.
Working capital is the liquid money that can be spent by the company for its day to day operations. It is not set aside, it is calculated, and operational costs vary with the amount of money put into it. However, fixed capital is not so; it is fixed and cannot be liquidated quickly.
Working capital can be converted into money efficiently for the use of the company. In contrast, fixed capital is not readily available as liquid cash, because it is necessary for the company or business in the fixed investment form and is not required to be converted.
Working capital offers benefits for the company for one or less than one accounting period. In comparison, fixed capital provides operational benefits for the company that extends more than one accounting period.
Working capital has a concise term in business and is temporary, while fixed capital is a long term investment that is essential for the company.
Working capital is consumed by the business and is spent according to requirement. However, fixed capital is not spent. Instead, it is used by the business for running it. Essentially, what this means is, working capital is consumed while the fixed capital is not.