Understanding the Difference Between Fixed and Working Capital

by | Feb 14, 2022 | Business Financing, Financial Advice, Insights To Business, Working Capital

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When you own a small business, having sufficient capital is extremely important. Both fixed capital and working capital are equally important if you plan to be successful. Understanding the difference between fixed capital and working capital is important and will help you operate your business with maximum efficiency. Once you know why you need them, you will be able to use both more efficiently making your day-to-day operations more cost-effective.

Fixed Capital

Fixed capital includes all of the tangible property owned by your business. These items are not sold off or liquidated quickly. It includes the long-term assets of the business like equipment, property, real estate, commercial equipment, inventory, and tools. Fixed capital also includes investments that depreciate over time. As your business grows, the amount of fixed capital you have will continue to increase.

Working Capital

Working capital is much more fluid. To determine how much working capital you have, you deduct what you owe (liabilities) from the value of what you have (assets). These are your liquid assets and what you will be using to pay the bills and keep your business functioning. As your working capital increases, you will be able to buy more inventory and expand the operations of your business. Increasing your working capital will allow you to pay off debts and increase your profits.

Why It’s Essential to Have Both

It’s great to have an abundance of fixed assets, but they won’t do you much good if you need money to pay your employees or keep the utilities turned on. With the right amount of working capital, your business will be able to grow steadily. You will have sufficient money to pay all of the bills that are needed to keep your company functioning on a day-to-day basis. This also includes paying your employees and paying your taxes. As your business becomes more efficient, the profits that are made can be reinvested in the business, allowing it to grow and expand.

Supplementing Your Working Capital

Every business will eventually hit a slow period. You can supplement your working capital with a small business loan. This type of loan will provide you with the working capital you need to keep your business running smoothly until the slow period passes. Many small business owners keep track of trends and will anticipate slow periods before they actually happen. By applying for a small business loan before they need it, it ensures they will have the working capital in place and accessible when they need it the most. Fixed capital and working capital are necessary for your business to function. Knowing the difference between fixed capital and working capital is the key to operating a successful business. Understanding how to keep your business in good financial condition will allow you to maximize the potential of both types of capital. This gives you the opportunity to make the most of every dollar. If you are constantly monitoring the financial health of your business, you will know when to apply for a small business loan. Being proactive and applying early will prevent any slowdowns and keep your business moving forward.