Page 3 - Lesson Note 5

after heavy investment is made is quite costly in terms of waste

of funds. Therefore, these decisions should be taken only after

carefully evaluating each detail or else the adverse financial

consequences may be very heavy.

Factors affecting the Requirement of Fixed Capital

1. Nature of Business: The type of business has a bearing upon the

fixed capital requirements. For example, a trading concern needs lower

investment in fixed assets compared with a manufacturing
organization; since it does not require purchasing plant and machinery,

etc.

2. Scale of Operations: A larger organization operating at a higher

scale needs bigger plant, more space etc. and therefore, requires higher

investment in fixed assets when compared with the small organization.

3. Choice of Technique: Some organizations are capital intensive

whereas others are labour intensive. A capital-intensive organization
requires higher investment in plant and machinery as it relies less on

manual labour. The requirement of fixed capital for such organizations

would be higher. Labour intensive organizations on the other hand

require less investment in fixed assets. Hence, their fixed capital

requirement is lower.

4. Technology Up gradation: In certain industries, assets become

obsolete sooner. Consequently, their replacements become due faster.

Higher investment in fixed assets may, therefore, be required in such
cases. For example, computers become obsolete faster and are

replaced much sooner than say, furniture. Thus, such organizations