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LoansJagat Team

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05 Aug 2025

What Is Fixed Capital? Meaning, Examples & Importance in Business

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Let’s say Meera starts a small cafe in Jaipur.

She invests ₹10,00,000 as fixed capital:

₹6,00,000 on furniture and kitchen equipment
₹3,00,000 on interior renovation
₹1,00,000 on a billing and inventory system

Then she keeps ₹3,00,000 as working capital for rent, staff salaries, raw materials, and electricity.

This balance helps her serve 100 customers/day, earning ₹12,000 daily. Monthly? That’s ₹3,60,000!

Isn’t it interesting how her one-time investment builds a foundation, while her working capital keeps the café running?

Fixed capital sets up the cafe, and working capital runs it daily. Both are needed to keep the business going smoothly.

What Is Fixed Capital?

Fixed capital includes long-term assets used to generate business income steadily. It’s not consumed quickly and helps in long-term production and growth.

Let’s understand it with the help of an example:

Let’s say Rahul starts a small bakery business. To begin, he buys an oven for ₹1,50,000 and a display counter for ₹50,000. These items won’t be sold and will help him bake and display cakes for many years.

This ₹2,00,000 is his fixed capital. It’s a one-time investment in assets that won’t be used up in a month but over several years. Unlike ingredients or packaging (working capital), these assets stay in the business and support regular production.

So, fixed capital helps build the base for long-term business operations.

What Are The Key Features of Fixed Capital?

Fixed capital refers to long-term assets used in business operations. Below is a table outlining the key features of fixed capital:

Feature	Explanation	Example
Long-term Investment	Used for purchasing durable assets with a multi-year lifespan.	A bakery buys machinery for ₹3,00,000 to use for 10 years.
Not for Resale	Assets are not bought to be sold quickly; they’re kept for operations.	Rahul buys an oven for ₹1,50,000; he doesn’t sell it but uses it daily to bake.
Low Liquidity	These assets can’t be quickly converted to cash without a loss in value.	The bakery’s building, worth ₹10,00,000, can’t be sold quickly like cakes or ingredients.
Depreciation	The value of assets reduces over time due to use and age.	The oven’s value drops from ₹1,50,000 to ₹1,20,000 in 2 years due to depreciation.
Essential for Infrastructure	These assets form the operational backbone of the business.	Without the ₹2,00,000 kitchen setup, the bakery can’t produce cakes.
Impact on Production	Directly increases output and business capacity.	One more machine of ₹50,000 increases cake production from 100 to 150 per day.
Source of Risk & Profit	High cost means risk, but it boosts long-term revenue.	Buying a ₹5,00,000 delivery van is risky, but it could increase sales by ₹1,00,000/month.

Fixed capital plays a crucial role in building a business’s foundation, driving production, and supporting long-term growth despite its lower liquidity and higher risk.

What Are The Sources of Fixed Capital?

Fixed capital is essential for acquiring long-term assets, and businesses use various sources to fund it. The table below explains the major sources of fixed capital:

Source of Fixed Capital	Explanation	Example
Equity Capital	Raised by selling company shares to investors; no repayment or interest obligation.	A startup raises ₹20,00,000 by issuing shares to 4 investors (₹5,00,000 each).
Debt Capital	Borrowed funds through loans or debentures with interest and repayment terms.	A business takes a ₹50,00,000 term loan from a bank at 10% interest to buy machinery.
Retained Earnings	Profits are kept in the business instead of being paid out as dividends.	A company earns ₹15,00,000 profit and reinvests ₹10,00,000 into upgrading its factory.
Government Grants/Subsidies	Financial aid from the government is used to promote certain sectors, like renewable energy or farming.	A dairy farm receives a ₹5,00,000 subsidy to build a cold storage facility.
Lease Financing	Renting equipment or property instead of purchasing it outright spreads the cost over time.	A bakery leases an oven costing ₹4,00,000 for ₹10,000/month for 4 years.
Venture Capital	Funding from VC firms in exchange for equity, usually in high-growth potential startups.	A tech startup receives ₹1 crore from a VC for 20% equity in the business.
Issuance of Shares (IPO/FPO)	Raising funds by selling shares to the public (IPO) or issuing new shares (FPO).	A company raises ₹100 crore via IPO to build a new manufacturing unit.

Each source of fixed capital has its advantages and limitations. Choosing the right mix depends on the business’s goals, financial health, and long-term plans.

What Is The Importance of Fixed Capital in Business?

Let’s say Priya starts a textile business by investing ₹50,00,000 in fixed capital ₹20,00,000 on land and building, ₹25,00,000 on machines, and ₹5,00,000 on software systems.

As a result, her daily production doubles to 1,000 garments, labour costs drop by ₹50,000/month, and design processes become faster.

The factory ensures stability, and the land’s value rises to ₹30,00,000 in 5 years. This investment in fixed capital helps things run more smoothly, improves efficiency, and builds a solid base for future growth and new ideas.

Importance of Fixed Capital in Business:

Importance	Explanation	Example
1. Enables Long-Term Growth	Supports business expansion, modernisation, and higher production capacity.	Priya opens a new unit using machinery worth ₹15,00,000, doubling her production.
2. Enhances Operational Efficiency	Modern tools and equipment reduce costs and increase output.	New machines reduce labour cost by ₹50,000/month and boost production.
3. Provides Stability & Sustainability	Creates a reliable foundation to operate smoothly over time.	Owning a factory avoids rent and ensures long-term usage of the premises.
4. Facilitates Technological Growth	Enables adoption of new technology, keeping the business competitive.	₹5,00,000 spent on design software helps create trendy patterns faster.
5. Adds Long-Term Value	Assets like land and buildings often appreciate over time.	Land bought at ₹20,00,000 is worth ₹30,00,000 in 5 years.

Fixed Capital vs. Working Capital:

Fixed capital and working capital serve different but equally important roles in business finance. The table below highlights their key differences across various aspects.

Aspect	Fixed Capital	Working Capital
Definition	Investment in long-term assets used over several years	Funds used for daily business operations
Purpose	Drives long-term growth and business expansion	Maintains smooth day-to-day operations
Examples	Buildings, land, machinery, and factory setup	Cash, inventory, wages, rent, utilities
Time Horizon	Long-term (multiple accounting periods)	Short-term (within one business cycle)
Liquidity	Low, not easily converted to cash	High, easily converted to cash
Depreciation	Depreciated over time	Not subject to depreciation
Stability	Offers structural and operational stability	Offers operational flexibility and liquidity
Financial Role	Forms the backbone of production capacity	Keeps the business running smoothly every day
Risk & Return	High initial investment, potential for long-term returns	Lower risk, but it directly affects short-term solvency

Understanding the distinction between fixed and working capital helps businesses manage resources wisely, ensuring both long-term growth and smooth day-to-day functioning.

Conclusion

Fixed capital and working capital are two essentials for any business. Fixed capital is used to set up things like machines and buildings, while working capital helps run daily needs like paying bills and buying materials. Both work together to keep a business running and growing. So, plan wisely, build strong, run smart, and watch your business succeed!

FAQs:

Q1: What is fixed capital in business?
Fixed capital is money invested in long-term assets like land, machinery, and equipment.

Q2: How is working capital different from fixed capital?
Working capital covers daily expenses, while fixed capital supports long-term setup and growth.

Q3: Can fixed capital be converted into cash quickly?
No, fixed capital is less liquid and not easily converted into cash.

Q4: What are common sources of fixed capital?
Equity, debt, retained earnings, government subsidies, and venture capital.

Q5: Why is fixed capital important for a business?
It builds the foundation for operations, boosts efficiency, and supports long-term expansion.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?

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