Meaning of Fixed Capital: It is the money invested in fixed assets which is to be used over a long period of time.
It is meant for meeting permanent or long term needs of the business.
Factors affecting requirement of fixed capital:
(i) Nature of business: In case of manufacturing business, heavy investment in fixed assets is required. In case of trading concern, less investment is required.
(ii) Scale of operation: Firms which operate at large scale require larger amount of fixed capital as they need heavy and bigger machinery and equipment.However, firms operating at small-scale need relatively larger fixed capital.
(iii) Diversification: Diversification of operations also govern the fixed capital requirements. If a company chooses to diversify its operation, then it certainly needs more fixed capital.
(iv) Financial alternatives: Fixed assets can either be purchased outrightly or can be acquired on lease or hire basis. When a company acquires an asset on lease, then it pays lease rentals and use it. Thus, availability of leasing facilities reduces the fixed assets capital requirement. On the other hand, a company which purchases assets on cash basis, requires more fixed capital.
The other factors are:
(a) Choice of technique
(b) Technology upgradation
(c) Growth prospects
(d) Level of collaboration etc.
However, most of the capital budgeting decisions cannot be reversed or reverted without incurring heavy losses. Therefore, they should be taken after evaluating each and every aspect, otherwise firm may have to incur heavy losses.