6 FACTORS AFFECTING THE REQUIREMENT FOR FIXED CAPITAL

J.O. EMMANUEL
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Fixed assets are assets that are used for more than one year. 

They are assets that are not expected to be used up within one year.

Examples are equipment, plant, and machinery.

Anytime a company invests in fixed assets, its fixed capital will increase.

By definition, fixed capital is money invested in things that will last a long time for the business, such as fixed assets or long-term projects.

Several factors affect the requirement for fixed capital, including; the nature of the business, the scale of operations, choice of techniques, technology gradation, diversification, and business growth prospect.

Now, let's look at the factors that affect the requirement for fixed assets individually.

1. Nature of business: This is one of the high biggest factors that determine the requirement for fixed capital.

The nature of the business determines the fixed capital requirement of a company.

Manufacturing businesses, for instance, will require a lot of fixed capital because they  produce goods, which requires the use of  specialized machinery, factories, and production lines.

On the other hand, service-based businesses have a lower fixed capital requirement because they do not have the same physical output requirements as manufacturing companies.

2. Scale of operations: This refers to the size of a business's operations.

Generally speaking, a company's fixed capital requirement increases with its scale of operations.

This is because a company with large-scale operations will need to invest in big plants, equipment, and other specialized infrastructures to support its operation.

On the other hand, a company with a small operation will require less fixed capital because it only needs to invest in a small number of fixed assets.

3. Choice of techniques: In economics, the choice of techniques refers to the decisions on the relative amounts of capital or labor to use in the production process.

Accordingly, a company can either employ more labor or more capital in its production process.

If a company employs more capital relative to labor, then it is said to be capital-intensive.

On the other hand, if a company employs more labor than capital, it is said to be labor-intensive.

How capital- or labor-intensive the company is also affects its fixed capital requirement.

If a company is capital-intensive, it will use more capital and less labor. 

It will spend heavily on plants, machinery, and other sophisticated equipment.

As a result, the company will require large fixed capital requirements.

By the same logic, a labor-intensive company will require fewer fixed capital requirements because it may not require as much expensive machinery and equipment.

4. Technology upgradation: This is the process through which a company replaces obsolete fixed assets with new ones.

Technology upgradation also determines the fixed capital requirement for a company because the replacement of obsolete assets usually comes with additional costs.

In fact, a company that relies heavily on fixed assets that are prone to obsolescence will invest heavily in new machinery when the old ones break down, increasing its fixed capital requirements.

5. Diversification: Diversification is one factor that can raise a company's fixed capital requirements, especially for an already existing company

If a company decides to diversify its business operations by expanding its product offerings, then its fixed capital requirement will increase.

Let's use the example of a software company that mostly develops and sells software but wants to diversify to the production and sales of laptops.

To achieve this, the company will need to buy new equipment and obtain additional facilities for the manufacturing and assembling of the laptop.

This will increase the fixed capital requirement of the company.

6. Growth prospect: It is generally believed that higher business growth necessitates higher fixed capital investments.

The reason is that as the business grows and expands its operation, it may need to invest in additional fixed assets to support the growth.

More so, business growth usually requires the usage of more advanced technological, equipment, plants, and machinery. 

For example, if a business is experiencing rapid growth in demand for its goods and expects to continue doing so in the future, it may decide to expand its production facilities to meet the increased demand for its goods.

On the other hand, if a company has limited growth prospects, it may not need to invest much in fixed capital and there will be no increase in fixed capital requirements.

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