Fixed capital and working capital are two very important assets in the ongoing function of just about every type of business. Each type of capital provides different benefits to the company and makes it possible to continue producing goods and services that are, in turn, offered for sale to customers. While both are used to pursue a common goal, the nature of each group of assets is somewhat different.
One of the main differences between the two concepts has to do with their respective roles. Fixed capital assets are those that are considered to be long-term or durable and can be used repeatedly over a long period of time as part of the business operation. Examples include the physical facility owned and operated by the company, the equipment that is used in the production process, and other holdings that are used daily to allow the business to operate. Fixed capital can be used for years before they need to be replaced.
By contrast, working capital refers to assets that are acquired and then used in business operations for a shorter period of time. This may include cash that flows into the business from different sources and is used to buy raw materials, manage debt, and honor the obligations that the company makes as part of its overall operation. With this in mind, the difference between the two types of capital becomes more clear, with one related to assets that provide benefit for a long time (this is what the “fixed” refers to), and the other having to do with assets that are constantly being received and just as rapidly being consumed as part of the business effort (this is what the “working” refers to).
Most companies require both fixed capital and working capital in order to function. Even if a business leases its physical location (as opposed to owning it), there is a good chance the company will still own some equipment that is essential to the ongoing function of the operation. At the same time, a steady flow of cash from the sale of goods and services, business loans, and business lines of credit make it possible to cover the day-to-day expenses of the operation and promote revenue generation. Keeping an ongoing inventory of both types of capital, and managing them properly, will go a long way in making sure the business is able to grow and thrive for many years.