Understanding the Classification and Importance of Capital in Business
Capital is crucial for businesses, whether for promotion, functioning, growth, or expansion. It can be classified as promotional, long-term, short-term, or development capital. Factors influencing capital requirements include business activity, size, product nature, technology, business cycle, and location. Fixed capital is essential for acquiring and maintaining fixed assets, playing a key role in long-term planning and the initial stages of business. Adequate fixed capital is vital for business efficiency and growth.
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Unit II Classification Of Capital Meaning:- -It is the basic requirement of a business. -It means amount of money or funds invested in the business. -It may be used as fixed capital or working capital. -It is required for the promotion, for orderly functioning and also for the growth, expansion and diversification of business activities. -Inadequate capital creates problems and difficulties for the business and also adversely affect profitability of the enterprise. -It is the Kingpin of modern business as modern business is capital intensive and needs regular/continuous financial support.
Classification of Capital:- 1. Promotional Capital (Capital for Business Promotion). 2. Long Term Capital/ Fixed Capital. 3. Short Term Capital/ Working Capital. 4. Development Capital (Capital for Business Expansion and growth).
Factors determining Capital Requirements:- 1. Nature of Business Activity. 2. Size of the business unit. 3. Nature of product. 4. Technology used in manufacturing. 5. Position of business cycle. 6. Location of the business unit.
Fixed Capital:- -It is a part of the total capital of a business unit and is used for buying, maintaining and replacing fixed assets such as land, buildings, machinery, plant, furniture, vehicles, etc. -In initial stages it is required for setting up production activities since manufacturing will not be possible without investment in fixed assets. -In addition, it is also required for expansion, modernisation and diversification activities. Definition of Fixed Capital - B. O. Wheeler Fixed capital is invested in fixed or long-run assets. The amount of fixed capital needed, therefore varies directly with the amount of fixed assets owned or used by a business unit.
Features of Fixed Capital:- 1. Needed for meeting long term needs. 2. Needs long term planning. 3. Needed at initial period. 4. Collected from various sources. 5. Requirement is variable. 6. Appreciation/depreciation possible. 7. Low liquidity. 8. Permanent nature.
Factors determining /affecting fixed capital requirements:- 1. Nature of business activity. 2. Size of business unit. 3. Scale of operations. 4. Type of product manufactured. 5. Method of manufacturing. 6. Method of acquiring fixed assets. 7. Scope of activities undertaken. 8. Government subsidies.
Importance/Benefits/Advantages of adequate fixed capital:- 1. Provides basic requirement of business. 2. Raises efficiency. 3. Supports expansion and diversification activities. 4. Facilitates replacement of old and obsolete assets. 5. Ensures long run stability and profitability. 6. Ensures lower cost of borrowed funds.
Sources of Fixed Capital:- 1. Issue of equity shares. 2. Issue of preference shares. 3. Issue of debentures. 4. Ploughing back of profits. 5. Loans from financial institutions. 6. Bank loans. 7. Lease financing.
Working Capital:- -It is required for meeting day to day or regular needs of the business unit. -It is required for the short term as it is recovered from the sale price of goods and services. -It is as important as fixed capital. -It is required for purchase of raw materials, payment of wages and other regular expenses like electricity, water charges, etc. -It indicates revolving or circulating flow of cash starting with cash paid for purchase of material and ending with cash receipt after the sale of finished goods. Definition-Shubin Working capital is the amount of funds necessary to cover the cost of operating the enterprise. Working capital in a going concern is a revolving fund, it consists of cash receipts from sales which are used to cover the cost of current operations.
Features of Working Capital:- 1. Useful for meeting regular needs. 2. Needed for short term. 3. It depends on various factors. 4. Fluctuating nature. 5. Easily convertible. 6. Ensures orderly working. 7. Collected from different sources.
Factors determining/affecting Working Capital:- 1. Nature/type of business. 2. Size of business unit. 3. Nature of operating cycle. 4. Time consumed in manufacturing process. 5. Speed of circulating capital. 6. Position of business cycle. 7. Seasonal variations. 8. Cash requirement.
Advantages/Benefits/Importance/Significance of adequate Working Capital:- 1. Continuity in business operations. 2. Higher efficiency. 3. Ability to face competition. 4. Ability to face seasonal fluctuations. 5. Ability to make payments. 6. Increases credit worthiness.
Types of Working Capital:- 1. Permanent Working capital. A. Initial Working Capital. B. Regular Working Capital. 2. Variable Working Capital. A. Seasonal Working Capital. B. Special Working Capital.
