Fixed capital and working capital are both important assets for businesses. Fixed capital is long-term and includes physical facilities and equipment, while working capital is short-term and includes cash flow for day-to-day operations. Both are necessary for a business to function and grow.
Fixed capital and working capital are two very important assets in the ongoing function of virtually all types of businesses. Each type of capital offers different benefits to the company and makes it possible to continue producing goods and services that, in turn, are offered for sale to customers. While both are used to pursue a common goal, the nature of each asset group is slightly different.
One of the main differences between the two concepts has to do with their respective roles. Fixed capital assets are those that are considered to be long-term or durable and can be used repeatedly over a long period of time as part of operating the business. Examples include the physical facilities owned and operated by the company, equipment used in the production process, and other property used daily to enable the company to operate. Fixed capital can be used for years before they need to be replaced.
On the other hand, working capital refers to assets that are acquired and used in business operations for a shorter period. This can include cash that flows into the business from different sources and is used to purchase raw materials, manage debt and honor obligations the business makes as part of its overall operation. With that in mind, the difference between the two types of capital becomes clearer, one being related to assets that provide benefits over a long period of time (this is what “fixed” refers to) and the other related to assets that they are constantly received and consumed just as quickly as part of the business effort (this is what “work” refers to).
Most businesses require both fixed capital and working capital to function. Even if a business leases its physical location (as opposed to owning it), there’s a good chance the business still owns some essential equipment for the ongoing running of the operation. At the same time, a constant cash flow from the sale of goods and services, commercial loans and commercial lines of credit makes it possible to cover day-to-day operating expenses and promote revenue generation. Keeping an ongoing inventory of both types of capital, and managing them properly, will go a long way to ensuring that the business can grow and prosper for years to come.
Asset Smart.
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