business financing
What do you mean by fixed capital?
The term ‘fixed capital’ is often considered to be equivalent to fixed assets, which represents the employment of capital in permanent assets and other non-current assets. The fixed assets are assets of enduring nature that the business does not aim to dispose of, or that could not be discarded of without interfering the business actions. Thus a company holds the fixed assets with the intention of making profits directly or indirectly and not for the purpose of sale in the ordinary course of business. The fixed assets include land, building, plant, machinery, furniture, fixtures, vehicles etc.
Making investment in the fixed capital is the primary step for setting up a business enterprise. The investment in non-current assets is termed as ‘fixed capital.’ Such assets include items in which capital is locked for a long time. Although they do not show the investment in physical productive facilities, yet they are essential for the success of the business and regarded as vital part of the capital arrangement.
There are certain enterprises, which cannot think of running in the absence of adequate amount of fixed capital. It is not only needed for funding the acquirement of fixed assets, but also for initial period of its functioning in order to establish itself. It is also required for making meliorations and amplifying the existing amount of business enterprise. Thus, it appears that right quantity of fixed capital is a necessary requirement for the success of an industrial concern.
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Submitted by admin on Tue, 2010-05-18 08:25.Capital Gearing
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Capital gearing is the most crucial factor, which must be taken into account while preparing the financial plan of a company. The term ‘gearing’ means the ratio between the various types of securities to total capitalization. Capital gearing is the process that determines the proportion in the various accounts of securities, which are being issued.
Capital Gearing or structure means the decision about the ratio, which different types of securities will bear, to total capitalization. Capital gearing or structure is the fixation of the appropriate ratio between two or more types of securities and the ratio that each type of security will bear to the total capitalization.
Capital Gearing can be defined as, “The mixture of debt and equity in a firm’s capital structure, which influences variations in shareholders profits in response to sales and EBIT variations.”
A company is stated to be highly geared when the proportion of the equity capital to the total capital is small or when the proportion of preference shares and debentures bearing fixed rate on dividend. On the other hand, the company is said to be low geared if it has a larger proportion of funds raised through the issue of equity shares without bearing any fixed rate of dividend.
In simple words, a company that has raises funds mostly by equity share is low geared while a company which has secured substantial proportion of its long term funds by the issue of preference shares, bonds, and debentures is highly geared.
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