Discuss the importance of finance in business. Distinguish between fixed capital and working capital?
Finance is regarded as the most important requirement of business. Firms may even fail due to lack of finance. In modern times, importance of finance has increased because activities related to business are now performed on a larger scale. If business enlarges, need for finance also increases. The second reason is that manufacturing process has become more complex. In order to produce, expensive machinery, tools, money is required. After production, the large quantities produced have to be stored in stock. Advertising has to be done so as to inform the ultimate consumers about the goods produced.
Wholesalers, dealers etc. are also required in order to distribute the goods. There is a growing need for finance, with the growth in size and volume of business and even with increasing complexity of trade and production. It is important to note that finance should be made available in adequate amount as and when required.
Distinction between fixed and working capital:
- In fixed capital, funds are required for purchase of fixed assets like land, building, plant and machinery, furniture etc. whereas in working capital, funds are required for holding current assets like stock of raw materials, finished- goods, book debts, bills receivable ,etc.
- Assets are needed for permanent use and for a long time period, in case of fixed capital. In case of working capital, finance is required, in order to fulfill the above mentioned purpose, at short intervals.
- Fixed capital is also called long-term capital whereas working capital is known as circulating capital or revolving capital.