What is the Difference Between Fixed Capital and Working Capital?

The main difference between fixed capital and working capital lies in their purposes and the duration for which they are used within a business. Here are the key differences between the two:

1. Purpose: Fixed capital is the investment made by a business for acquiring long-term assets, such as property, equipment, or facilities, that are needed to start and maintain the business. On the other hand, working capital is the money used to cover daily operational expenses, like meeting payroll and paying bills.
2. Types of Assets Acquired: Fixed capital is used to acquire non-current assets for the company, which are typically tangible assets that serve the business for more than one accounting cycle. In contrast, working capital is used to acquire current assets, such as cash, debtors, and inventories, which can be converted into cash within one year.
3. Liquidity: Fixed capital is not liquid, as it is invested in long-term assets that cannot be easily converted into cash. Working capital, on the other hand, is highly liquid, as it consists of assets that can be quickly transformed into cash.
4. Duration: Fixed capital is required before the business starts and serves the business for a longer period, often for more than 12 months. In contrast, working capital is required after the business gets started and is used to finance day-to-day operations, generally defined as the following 12 months.

In summary, fixed capital and working capital serve different purposes within a business. Fixed capital is invested in long-term assets that support the business's long-term growth, while working capital is used to finance day-to-day operations. Both forms of capital are essential for a business's success, but they have distinct functions and time horizons.

Comparative Table: Fixed Capital vs Working Capital

The main difference between fixed capital and working capital lies in their usage and liquidity. Fixed capital is invested in long-term assets that support the business indirectly and serve over a long period of time, while working capital is used for short-term financing and directly supports the business's day-to-day operations. Here is a table highlighting the key differences between fixed capital and working capital:

In summary, fixed capital is used to invest in long-term assets that indirectly support the business, while working capital is used to finance the company's daily operations and directly supports its short-term needs.