Factors Affecting Fixed Capital Requirement

Every businessman needs funds to finance the business he wants to buy

. Investment needs to be made in fixed and current assets. The decision regarding investment in fixed assets has to be taken carefully because it involves huge capital.

Capital budgeting decisions needs to be managed because of a business has to have long term growth, large amount of funds are involved, huge risk thereof and such decisions are irrevocable.

When you buy an existing business you have to put in some amount of fixed capital in it. Let me make you understand some factors that affect the requirement of fixed capital for a business.

So, when you evaluate the cost of a business, take into account all the factors mentioned below:

Nature of business: The type of business has a bearing upon the fixed capital requirements. A trading concern requires lesser capital as compared to a manufacturing business because they have to buy machinery, plant etc.Scale of operations: An organization operating on a large scale requires a larger capital investment in fixed assets.Choice of technique: The choice of technique is based upon labor intensive or capital intensive. An organization working with labor intensive technique will certainly require a lower fixed capital.Technological advancement: This aspects needs to be understood from two different perspectives. Firstly, you have to make the required capital investment according to the technology in use in the business you want to buy. Secondly, if you wish to make certain changes in the business in terms of technological advancement, then the capital required would be increased accordingly.Growth prospects: If the growth rate of a business would be high the owner of the business for sale will demand a higher price for it and so would the capital requirement be. You will have to have adequate resources to meet the anticipated higher demand quicker.Financing Alternatives: Leasing facility outright the need of purchase. Thus the capital requirement will decrease depending upon the financing alternatives available to you.Level of collaboration: The level of collaboration and sharing of each others' facilities by a business affects the need of capital requirement in fixed assets for both the businesses.Diversification: if you are planning to diversify the operations of the business for sale then the capital requirement will be increased accordingly.

It is essential to meet out the need of fixed capital in order to make sure that you are able to not just buy the business but also run it smoothly.

Thus look for adequate financing sources and avail the opportunity of getting your business financed at a lower interest rate.

by: Pearl.S

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