Difference between Fixed Capital and Working Capital

For a business to run efficiently a businessman needs to invest capital in the company. this capital is further bifurcated into two different parts. These are Fixed capital and Working Capital. Both Fixed Capital and Working capital need to be present in a company. Moreover, the management should try to keep a balance between the two. a perfect balance between the two will help the business to generate more revenue as well as ensure the smooth working of the business.

The definitions of the two types of capital as well as the difference between both are given below.

What is Fixed Capital?

Fixed Capital comprises funds that are invested for the generation and creation of assets for the long term. These are spending which cannot be avoided and are a constant factor in the business. this type of capital is perpetual in nature and is used for the acquisition of tangible (building other infrastructure) and intangible (Goodwill, Intellectual Property, etc.). The total Fixed Capital can be found out using the Accounting Process.

What is Working Capital?

In layman terms, Working Capital is the capital that is not kept for the long term and is used for the day to day business activities of the business. the working capital comprises current assets which can be transformed into liquid within one year. This will include financial instruments such as cash, debtors, inventories etc. It also includes liabilities such as short term loans, tax provisions, creditors etc.