What is 'Fixed Capital'
Fixed capital includes the assets and capital investments that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not consumed or destroyed during the actual production of a good or service but have a reusable value. Fixed-capital investments are typically depreciated on the company's accounting statements over a long period of time, up to 20 years or more.
BREAKING DOWN 'Fixed Capital'Serving as the mechanism upon which production activities take place, fixed capital includes tangible items, such as equipment and facilities, which are needed for business operations. Fixed capital does not include materials used in the actual composition of the good being produced. Investments in fixed capital include the addition of new tools and equipment, as well as real estate need to create and house the goods being produced.
Fixed Capital Requirements
The amount of fixed capital needed to set up a business is quite variable, especially from industry to industry. Some lines of business require high fixed-capital investment. Common examples include industrial manufacturers, telecommunications providers and oil exploration firms. Service-based industries, such as accounting firms, may have more limited fixed capital. This can include office buildings, computers and networking devices, and other standard office equipment.
While production businesses often have easier access to the inventory necessary to create the good being produced, the procurement of fixed capital can be lengthy. It may take a business a significant amount of time to generate the funds necessary for larger purchases, such as new production facilities, or external financing may be required. This can increase the risk of financial losses associated with low production if a company experiences an equipment failure and does not have redundancy built into the fixed capital assets.
Actual Depreciation Rates
Fixed capital investments typically don't depreciate in the even way that is shown on income statements. Some devalue quite quickly, while others have nearly infinite usable lives. For example, a new vehicle loses significant value when it is officially transferred from the dealership to the new owner. In contrast, company-owned buildings may depreciate at a much lower rate.
The depreciation method allows investors to see a rough estimate of how much value fixed-capital investments are contributing to the current performance of the company.
Liquidity of Fixed Capital Assets
While fixed capital often maintain a level of value, these assets are not considered very liquid in nature. This can be due to the limited market for certain items, such as manufacturing equipment, or the high price involved, as with real estate. Additionally, the time commitment required to sell fixed capital assets is often lengthy.