Difference Between Fixed Capital and Working Capital

Effective financial management is important for the development and growth of any business. Fixed and working capital are essential components of financial management. Being able to differentiate between fixed capital and working capital enables companies to allocate resources rationally.

Balancing fixed and working capital is crucial for small start-ups in India as well. Companies that invest properly in fixed capital will have stability for many years to come, while those managing their working capital well can run their daily business activities without any hassles.

This article explains the difference between fixed capital and working capital in simple terms, focusing on the Indian business environment.

Also Read: What is Fixed Capital? Types and Importance

What is fixed capital?

Fixed capital, here, refers to investments in assets dedicated to operating a business over prolonged periods. These assets cannot be sold or consumed outright within a day-to-day business model but are used for production, expansion and efficiency.

Examples of fixed capital

• Land and buildings – Factories, warehouses, and offices.
• Machinery and equipment – Production tools, manufacturing machines, and IT systems.
• Vehicles – Trucks and transport used for business.
• Patents and trademarks – Intellectual property protecting business innovations.

Why is fixed capital important?

• Supports business expansion – Helps companies grow and scale operations.
• Ensures long-term productivity – Provides assets necessary for business sustainability.
• Enhances operational efficiency – Reduces long-term costs and improves output.
• Fixed capital investment in India

Businesses in India often secure long-term business loans from financial institutions to invest in fixed assets. These assets, in turn, help generate revenue over time.

What is working capital?

Working capital is the money needed for daily business operations. It ensures that companies can pay for routine expenses like wages, inventory, and utilities.

Components of working capital

• Current assets – Cash, raw materials, finished goods, and accounts receivable.
• Current liabilities – Short-term debts, bills payable, and salaries.

Why is working capital important?

• Maintains liquidity – Ensures a company can meet short-term financial obligations.
• Improves cash flow – Helps manage operational costs efficiently.
• Supports daily operations – Keeps the supply chain running smoothly.

Key differences between fixed capital and working capital

Understanding the difference between fixed capital and working capital helps businesses plan investments wisely. Here’s how they differ:

1. Duration

Fixed capital – Long-term, used for years.

Working capital – Short-term, used within a year.

2. Purpose

Fixed capital – Used to purchase assets for business operations.

Working capital – Used for day-to-day expenses like salaries and inventory.

3. Liquidity

Fixed capital – Low liquidity; assets are not easily converted to cash.

Working capital – High liquidity; funds are used in daily transactions.

4. Source of funding

Fixed capital – Usually financed through long-term business loans or equity.

Working capital – Often managed through short-term credit or cash reserves.

Examples

Fixed capital – Buying a factory, purchasing machinery.

Working capital – Paying employees, restocking inventory.

Why both are important for businesses in India

The importance of both fixed and working capital for companies in India cannot be underestimated. Without fixed capital, an organization cannot create the necessary infrastructure that it needs or acquire crucial tools for production. At the same time, without working capital, daily operations may stop.

Many enterprises in India solve this issue by borrowing money or using business loans. The Mudra Loan Scheme provides small enterprises with up to INR 10 lakh that they can use to meet these requirements for either working or fixed assets.

Also Read: A Guide on Home Loan Balance Transfer

The Bottom Line

Understanding the difference between fixed capital and working capital helps businesses make smart financial decisions. Fixed capital supports long-term growth while working capital ensures smooth daily operations. Both are necessary for success in the Indian business landscape.

Looking for financial support to manage your business capital? Explore funding options today and apply for a business loan to secure the resources you need!

For a better financial plan, use an EMI calculator to approximate your monthly loan repayments and fulfil your fixed or working capital requirements.

Also Read: Everything you need to know about Business Loan – A definitive guide

FAQs

Q.1. What is the difference between fixed and working capital?

A. Fixed and working capital are both important to a small business as well as large enterprises. Fixed capital includes the assets or investments needed to start and maintain a business. These can include property or equipment. On the other hand, working capital are liquid assets that a business uses to cover daily operations, like meeting payroll and paying bills. This can include cash.

Q.2. Is petrol working or fixed capital?

A. Petrol is considered working capital. This is because it is consumed in the production process and needs to be replenished regularly.

Q.3. What is an example of a fixed capital?

A. Fixed capital is a business's long-term assets that remain fixed and are used to generate revenue. These include land, vehicles, buildings, equipment, etc.

Q.4. Is salary a fixed capital?

A. Salary doesn’t remain the same in the long term and is a day-to-day operational expense. This makes it working capital, not fixed capital.

Q.5. How can a business manage its working capital effectively?

A. Businesses can manage working capital by balancing credit and debits. They can also optimize inventory levels and ensure steady cash flow to cover daily operational expenses. This way, working capital like cash can be managed.

Disclaimer:

The contents of this article are for information purposes only and not financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.