Explain the following as factors affecting the requirements of fixed capital:
(i) Scale of operations;
(ii) Choice of technique;
(iii) Technology upgradation and
(iv) Financing alternatives.


(i) Scale of Operations: A larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.
(ii) Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations, on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower. 
(iii) Technology Up gradation: In certain industries, assets become obsolete sooner and, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases. Thus, such organisations which use assets which are prone to obsolescence require higher fixed capital to purchase such assets.
(iv) Financing alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus reduce the fixed capital requirements.

581 Views

Explain any four points that highlight the importance of financial planning.


Financial planning is the process of preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time.
The importance of financial planning is:
(i) It helps in forecasting what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. By preparing a blueprint of these three situations the management may decide what must be done different situations.
(ii) It helps in avoiding business shocks and surprises and helps the company in preparing for the future.
(iii) If helps in co-ordinating various business functions, e.g., sales and production functions, by providing clear policies and procedures.
(iv) Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.
(v)  It tries to link the present with the future.
(vi)  It provides a link between investment and financing decisions on a continuous basis.

934 Views

Advertisement

State any four factors which affects the requirements of working capital of a company.  


1) Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery, etc.

2) Scale of Operations: A larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.

3) Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower.

4) Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets. Even when such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails larger investment in fixed assets and consequently larger fixed capital.

562 Views

Advertisement

Define ‘Capital Structure’. 


According to Gerstenberg, Capital structure refers to “the makeup of a firm’s capitalisation”. It is the proportion of a company’s capital, financed through owners and borrowed funds. In other words, it represents the mix of long-term funds such as equity shares, preference shares, long-term loans, retained earnings etc., in the total capitalisation of a firm.

 

518 Views

How does ‘Inflation’ affect the working capital requirements of a company? State.


Inflation is a situation of sustained increase in the general price level of goods and services. In such a situation, the working capital required to maintain a normal level of production and sale also increases. Inflation leads to increase in the cost of raw material, rise in wage rate, and rise in all other expenses and thus lead to a need for more working capital. The working capital requirement of a business thus, become higher with higher rate of inflation.

533 Views

Advertisement