What Is Fixed Capital?

Fixed capital is money that has been invested in fixed assets or the long-term assets that a company needs to start up and conduct business, such as 澳洲幸运5开奖号码历史查询:property, plant, and 🦹equipment (PPE). These assets are considered fixed in that they are not consumed or destroyed durin🉐g the actual production of a good or service but have a reusable value.

Fixed capital is a concept used in economic thinking as well as business accounting. In accounting terms, fixed capital is a metric that can be used to understand the financial health of a business. Fixed capital investments are typically depreciated on the company's accounting statements over a long period of time—up to 20 years or more. In contrast, 澳洲幸运5开奖号码历史查询:working capital describes the funds and assets that a business needs to pay for its day-to-day operations in the short term.

Understanding Fixed Capital

The concept of fixed capital was first introduced in the 18th century by the political economist 澳洲幸运5开奖号码历史查询:David Ricardo. For Ricardo, fixed capital referred to any kind of physical asset that is not used up in the production of a product. This was opposed to Ricardo's idea of 澳洲幸运5开奖号码历史查询:circulating capital, such as raw materials, operating expenses, and labor. In Marxian economics, fixed capital is closely related to the concept of constant capital.

Fixed capital ♏is the portion of total capital outlay of a business invested in physical assets such as factories, vehicles, andꦯ machinery that stay in the business almost permanently, or, more technically, for more than one accounting period. Fixed assets can be purchased and owned by a business, or they can be structured as a long-term lease.

On the other side of the capital equation is what circul🥀ates, or what is consumed by a company in the process of production. This includes raw materials, labor, operating expenses, and more. Marx emphasized that the distinction between fixed and circulating capital is relative since it refers to the comparative turnover times of various types of physical capita💟l assets.

Fixed capital also "circulates," except that the turnover time is far longer because a fixed asset may be held for several years or decades before it has yielded its value and is discarded for its 澳洲幸运5开奖号码历史查询:salvage value. A fixed asset may be resold and reused at any time before its 澳洲幸运5开奖号码历史查询:useful life is over, which oft🌺en happens with vehicles and airplan🍌es.

Fixed capital assets can be contrasted with variable assets, the cost and level of which change over time, and with the scale of a company's output. For instance, machinery used in production would be considered fixed ca꧂pital, as it would remain with a ♚company regardless of current output levels. Raw materials, on the other hand, would fluctuate depending on output levels.

In accounting terms, fixed capital can also be compared to 澳洲幸运5开奖号码历史查询:working capital, which refers to the funds a꧟nd liquid asset🧸s needed to cover a business's daily operational expenses.

Fixed Capital Requirements

The amount of fixed capital needed to set up a business is quite particular to e🦋ach situation, especially from industry to industry. Some lines of business require a large number of fixed-capital assets. Common examples include industrial manufacturers, telecommunications providers, and oil exploration firms. Service-based industries, such as accounting firms, have more limited fixed capital needs. This can include office buildings, computers, networking devices, and other standard office equipment.

While production businesses often have easier access to the inventory necess💞ary to create the goods being produced, the procurement of fixed capital can be lengthy. It may take a business a significant amount of time to generate the funds necessary for larger purchases, such as new production facilities. If a company uses financing, it may take time to obtain proper loans. This can increase the risk of financial losses associated with low production if a company experiences an equipment failure and does not have redundancy built in.

Depreciation of Fixed Capital

Fixed capital investments typically don't depreciate in the even way that is shown on income statements. Some devalue quite quickly, while others have nearly infinite usable lives. For example, a new vehicle loses significant value when it is officially transferred from the dealership to the new owner. In contrast, company-owned buildings may depreciate at a much slower rate.

The depreciation method allows investors to see a rough estimate of how much value fixed c♏apital investments are contributing to the current performance of the company.

Liquidity of Fixed Capital

While fixed capital often maintains a certain level of value, these assets are not considered very liquid in nature. This is due to:

• The limited market for certain items, such as manufacturing equipment
• The high price of these assets
• The time it takes to sell a fixed asset, which is usually lengthy

The Bottom Line

Fixed capital is a necessary aspect of any business, although the nature of it varies depending on the company and industry. Every industrial enterprise requires land, buildings, and other major equipment to get starte🅠d and continue🌳 operations in the long term.

While fixed capital tends to🧸 serve the business indirectly over a long period of time, working capital is required in the short term to keep the business operating, growing, and paying its employees. Both are important acc🌊ounting metrics used to analyze the financial health of a business.