What are Features of Fixed Capital?
The ten important features of fixed capital are depicted in the following image.
The main characteristics or features of fixed capital are listed as follows:
- Purchase of fixed assets.
- Promotion and expansion of business.
- Low liquidity.
- Permanent in nature.
- Primary sources.
- Amount of fixed capital.
- Long-term needs of business.
- Source of wealth and risk.
- Source of profit.
- Appreciation and depreciation.
- Miscellaneous features.
Now let's discuss each feature of fixed capital one by one.
1. Purchase of fixed assets
Fixed capital is capital invested in fixed assets. In other words, it is capital used for purchasing fixed assets.
The fixed assets can be grouped under two main categories, viz.,
- Tangible fixed assets includes land, building, plant, machinery, etc.
- Intangible fixed assets includes patents, copyrights, goodwill, so on.
2. Promotion and expansion of business
Fixed capital is required for promoting business and its ancillary (supplementary) activities.
Along with promotion, fixed capital also helps in the expansion, modernization and diversification of business.
3. Low liquidity
In general, the definition of liquidity can be stated as follows:
“Anything which is easily saleable in the market and gets an expected value (price) is said to be liquidable. That is, it has a liquidity.”
Low liquidity means something, which is not easily realizable (i.e. saleable).
Fixed capital is used to acquire (purchase) fixed assets. These assets have a low liquidity because they are not easily saleable.
4. Permanent in nature
Fixed capital has a long-lasting existence. It is permanent in nature. It cannot be withdrawn from the business. However, it can be withdrawn only when the business closes or shuts down (i.e. liquidates).
5. Primary sources
Primary sources of fixed capital are shares, debentures and long-term loans.
In the accumulated i.e. total fixed capital,
- The owners funds come from shares.
- The fixed borrowed funds come from debentures.
- The long-term loans are obtained from financial Institutions.
Of the above three sources, shares are the main source of fixed capital.
6. Amount of fixed capital
The amount of fixed capital depends on the following factors:
- Nature of business.
- Size of company or organization.
- Location of business.
- Business-related infrastructure facilities.
- Methods of production.
7. Long-term needs
Fixed capital is used to meet the long-term needs of the business some of which are listed below.
8. Source of wealth and risk
Fixed capital is a source of wealth. However, it is also a source of risk. This is because it causes:
- Depreciation of fixed assets.
- Outflow of interest cost.
- Normal repairs and maintenances.
- Contingencies and uncertainties attached to the business.
9. Source of profit
Profit is the difference between sale price and cost of purchase.
Fixed assets are also sources of profit. These assets help in earning profit through the sale of products.
However, fixed assets cannot earn a profit by themselves. They take help of following factors of production to earn the profit:
- Infrastructure facilities covering supply of electricity, fuel, water, etc.
10. Appreciation and depreciation
The meaning of two terms viz., appreciation and depreciation are contrary to each other. Their individual meaning is stated below.
- Appreciation means an increase in the value of an asset being used.
- Depreciation indicates a decrease in the value of an asset being used.
Fixed assets can undergo either an appreciation or depreciation over a period of time. The value (price) of some fixed assets like land appreciate after some period of time. However, the value of other fixed assets such as building, machinery, furniture, etc., depreciate after some period of time.
11. Miscellaneous features
Miscellaneous features of fixed capital are as follows:
- Fixed capital improves financial analysis.
- It provides a long-term business stability.
- It helps in getting term loans.
- It also improves equity capital ratio.