It’s very important to have sufficient capital when you own a small business. But if you plan on truly being successful, it’s equally important to have both fixed and working capital. What else is important? Knowing the difference between them. That way, with maximum efficiency, you’ll be able to better operate your business. For more cost-effective day-to-day operations, efficient use of both fixed and working capital is essential.
Let’s take a look at the differences between these types of business capital.
Working capital is more fluid compared to fixed capital. Deduct your liabilities (what you owe) from your assets (the value of what you have) to figure out your amount of working capital. This is what you’ll use to keep your business functioning, pay bills, etc. – they are your liquid assets. You’ll be able to expand business operations and buy more inventory as your working capital increases. You will also be able to increase your profits and pay off debts as you increase your working capital.
All of your tangible business-owned property is included in fixed capital. Meaning, items that are not liquidated or sold off quickly. It includes long-term business assets such as the following:
- Commercial equipment
- Real estate
Investments that depreciate over time are also included in fixed capital. Your fixed capital will also increase as your business grows.
The Need For Both Fixed and Working Capital
Lots of fixed assets are a great thing to have. However, if you require funds to keep the utilities on or pay your employees, they won’t do you much good. Your business will be able to steadily grow with the right amount of working capital. For your company to function well on a day-to-day basis, and pay off all the bills you acquire, you’ll have sufficient money. Also included in this would be things like paying your taxes and paying our employees. Acquired profits can be reinvested in your business as your business becomes more efficient. This will allow you to expand and grow.
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