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What Is the Difference Between Fixed Capital and Working Capital?

Working capital is the amount of money a company has to do business with.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 November 2014
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Fixed capital and working capital are two very important assets in the ongoing function of just about every type of business. Each type of capital provides different benefits to the company and makes it possible to continue producing goods and services that are, in turn, offered for sale to customers. While both are used to pursue a common goal, the nature of each group of assets is somewhat 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 the business operation. Examples include the physical facility owned and operated by the company, the equipment that is used in the production process, and other holdings that are used daily to allow the business to operate. Fixed capital can be used for years before they need to be replaced.

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By contrast, working capital refers to assets that are acquired and then used in business operations for a shorter period of time. This may include cash that flows into the business from different sources and is used to buy raw materials, manage debt, and honor the obligations that the company makes as part of its overall operation. With this in mind, the difference between the two types of capital becomes more clear, with one related to assets that provide benefit for a long time (this is what the "fixed" refers to), and the other having to do with assets that are constantly being received and just as rapidly being consumed as part of the business effort (this is what the "working" refers to).

Most companies require both fixed capital and working capital in order to function. Even if a business leases its physical location (as opposed to owning it), there is a good chance the company will still own some equipment that is essential to the ongoing function of the operation. At the same time, a steady flow of cash from the sale of goods and services, business loans, and business lines of credit make it possible to cover the day-to-day expenses of the operation and promote revenue generation. Keeping an ongoing inventory of both types of capital, and managing them properly, will go a long way in making sure the business is able to grow and thrive for many years.

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clintflint
Post 3

One of my favorite furniture stores talks about this on their website and how they can afford to keep their prices down because they own all their own property and so, don't have to pay rent.

I guess that's the idea for most businesses, and why new ones often fail. They don't have enough of either kind of capital and don't manage to find a balance between the two.

Mor
Post 2

@irontoenail - That problem with that is that when you make a public institution into a business, and the people around it aren't wealthy enough to provide a good flow of working capital, they end up trying to get the working capital from other places, like cutting corners or selling off fixed capital.

Like it says in the article, you need both to run a business well. If you don't have enough working capital, you start to lose your fixed capital. If you don't have enough fixed capital, you'll usually end up using too much working capital (for example, through rent).

That's why letting the government administer funds to schools is a better system in some cases, because that way they get more working capital.

irontoenail
Post 1

I was working in a school a few years ago, basically filing papers and I happened to look at some of their financial papers. I couldn't believe how much they had going in investments. The people who ran the school had basically been running it like a business, but with all the proceeds going towards the students, so they were able to build a new building for the school (like a big gym, or a photography studio) pretty much every year.

So I guess they had a good grasp of both fixed and working capital. I wish that more schools were able to work this way.

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