As we all know, capital is an essential element in all kinds of business. No one can run a business without capital (Also see Capitalizing versus Expending costs). There are two types of capital, which are working capital and fixed capital. Working capital refers to the capital that the company requires to finance its daily operation. On the other hand, fixed capital is the capital that the company has invested to purchase the fixed assets that it needs to run the business.
Business owners may wonder: How can I know the amount of working capital and fixed capital I have? To determine the working capital, business owners may refer to the cash flow statement. Fixed capital, on the contrary, is the capital investments like the PPE (property, plant and equipment), as well as the assets that business owners need to run their business. Most of these items will appear on the balance sheet, and they are not liquid and will be depreciated as time passes.
From here, we get to know that the financial statements (Also see Limitations of Financial Statements) play a great role in telling various information to the business owners. To ensure that those statements can show the actual financial (Also see Do You Know What is Financial Reporting) position of the company, business owners should seek help from an accounting firm in Johor Bahru if they need assistance in generating the statements.
After knowing the definition of both working capital and fixed capital, let us look at some of the dissimilarities between them.
Working capital is the capital that the business owners or the shareholders have injected into the business to fulfil the company’s daily requirements. This means that they tend to use the working capital to acquire current assets for the company. As opposed, fixed capital refers to the funds that the owners have invested to accrue long-term benefits for the company. Thus, this capital will be used when the company acquires necessary non-current assets.
Working capital has high liquidity when compared to fixed capital. This means that business owners can convert working capital into cash very quickly, but the fixed capital is unable to do so. In terms of the time these capitals will be serving the company, the working capital will only serve the company for a short time, while fixed capital has a longer-term. Thus, the former will bring benefits to the company within an accounting period, whereas the latter will offer benefits to the business for more than one period.
In conclusion, business owners require working capital to run the business, and fixed capital serves the company in a longer-term indirectly. Both of them are equally important for the growth and development of the business. Thus, as a business owner, do not forget to review the working capital and fixed capital of your company regularly.