Fixed Capital & Working Capital
Financial planning refers to the process of estimating the fund requirement of a business and specifying the sources of funds and ensuring that there are no idle funds. Proper understanding of financial planning helps in forecasting financial results, providing a link between investments and financing decisions, avoiding business shocks and surprises, etc. Factors affecting financial planning:
• nature of industry,
• size and reputation of the firm,
• capital market conditions, etc.
Capital structure refers to the mix between owner’s funds (equity) and Borrowed Funds (Debt). Capital structure consists of Owner’s fund i.e., equity and Borrowed funds i.e., debt. Owner’s fund comprises equity shares, preference shares, retained earnings whereas borrowed funds comprise debentures, loans from banks and loans from financial institutions. Capital gearing refers to the ratio between equity and debt funds. When proportion of debt is high, it is called as high gearing whereas when proportion is low, it is called as low gearing. Factors influencing capital structure are management control, state of capital markets, flexibility, regulatory framework, etc.
Business needs funds to invest into two ways i.e., fixed and working capital.
• Fixed capital refers to the amount of capital investments in fixed assets like plant & machinery, land & building etc, and this is financed through long-term sources. Factors affecting fixed capital requirements a re nature of business, scale of operations, choice of techniques, technology upgradation, etc.
• Working capital refers to investment in current assets. Working capital is classified into Permanent and Temporary working capital. Permanent working capital is classified into initial and regular working capital whereas temporary working capital is classified into seasonal and special working capital. The factors affecting working capital requirements are credit availed, operating efficiency, availability of raw materials, growth prospects, level of competition and inflation.