Difference Between Fixed Capital and Working Capital

Updated on May 13, 2024
Article bySayantan Mukhopadhyay
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Fixed Capital and Working Capital Differences

The primary difference between fixed capital and working capital is that Fixed Capital is the capital invested by the company in procuring the fixed assets required for the business’s working. In contrast, the company’s working capital is required to finance its day-to-day operations.

Capital is a critical ingredient in any business. Without capital, no business can be run, and no business can exist. Capital can be categorized into two forms – fixed capital and working capital.

  • Fixed capital is used to acquire non-current assets that would serve the business for more than one accounting period.
  • On the other hand, working capital is used to serve the business on a day-to-day basis fulfilling the requirement of everyday production and operation.
Fixed Capital vs Working Capital

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In this article, we will look at each of them separately and will also look at a comparative analysis between them.

Fixed Capital vs Working Capital Infographics

Fixed Capital vs Working Capital Infographics

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Working Capital vs. Fixed Capital Video Explanation

 

Key Differences Between Fixed Capital and Working Capital

  • Fixed capital supports the business indirectly. Working capital supports the business directly.
  • Fixed capital is invested in long-term assets. Working capital is invested in current assets.
  • Fixed capital is required before the business starts. Working capital is required after the business gets started.
  • Fixed capital can’t be liquidated into cash immediately. Working capital can be liquidated into cash immediately.
  • Fixed capital serves the business for a very long period. Working capital serves the business for a brief period.
  • The orientation of fixed capital is strategic. The orientation of working capital is operational.

Comparative Table

Basis for ComparisonFixed CapitalWorking Capital
MeaningFixed capital is the investments made by the business for accruing long-term benefits.Working capital is the daily requirement pumped into the business.
Acquiring types of assetsFixed capital is used to acquire non-current assets of the company.Working capital is used to acquire the current assets of the company.
How liquid is it? Not at all liquid.Very much liquid.
Conversion It can’t be converted into cash or kind immediately.It can be converted into cash or kind immediately.
TermServes the business for an extended period;Serves the business for a concise period;
Accounting periodIt offers benefits for more than one accounting period.It offers benefits for less than one accounting period.
ObjectiveStrategy-oriented.Operational.
ConsumptionIt doesn’t directly consumed the business but serves the business indirectly.Business needs working capital to operate.

Conclusion

Fixed capital and working capital are imperative for a business to run and perpetuate. And it’s not right to say that one is more important than the other.

However, without fixed capital, it’s impossible to start a business. And after the business gets started, it’s impossible to run a business without working capital.

Every business, thus, needs to take special care of them both. But it is equally important to invest in the right assets so that the business can benefit from the assets and make use of them regularly.

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This article has been a guide to Working Capital vs. Fixed Capital. Here we discuss the top 8 differences between fixed capital and working capital along with infographics and a comparative table. You may also look at these recommended articles for further reading –

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