Fixed Capital

Key takeaways

• Fixed capital is money invested in long-term physical assets used in production, such as property, plant, and equipment (PP&E).
• These assets are not consumed during production and provide value over multiple accounting periods.
• Fixed capital is typically illiquid and depreciates over time; it can be owned or held via long-term leases.
• Fixed capital contrasts with working (or circulating) capital, which covers short‑term operational needs like payroll and inventory.

What is fixed capital?

Fixed capital refers to funds invested in long‑lived physical assets that a business uses to produce goods or deliver services. Examples include land, buildings, factory machinery, vehicles, and major IT hardware. These assets remain with the business across multiple accounting periods and are not used up in a single production cycle.

Historical and conceptual background

The term dates back to classical political economy (e.g., David Ricardo), who distinguished fixed capital (physical assets not consumed in production) from circulating capital (raw materials, wages, other inputs that are consumed). Marxian economics elaborates on similar distinctions, noting that fixed capital “turns over” more slowly than circulating capital. In practice, fixed capital may be resold or reused before the end of its useful life, yielding a salvage value.

What fixed capital includes

Common fixed capital items:
* Land and buildings
Manufacturing and processing equipment
Vehicles and aircraft
Long‑life IT systems and network infrastructure
Long‑term leased assets used operationally

Fixed assets may be purchased outright or acquired through long‑term lease arrangements.

Depreciation and useful life

Fixed capital is recorded on the balance sheet and depreciated over its expected useful life. Depreciation methods (straight‑line, declining balance, etc.) provide an accounting estimate of how the asset’s cost is allocated to periods of use. Real‑world value loss varies: some assets (e.g., vehicles) depreciate quickly, while others (e.g., land or well‑maintained buildings) decline slowly or may appreciate. Salvage value is the estimated residual worth at the end of useful life.

Liquidity considerations

Fixed capital is generally illiquid because:
* Markets for specialized equipment are limited.
Assets are often expensive and take time to sell.
Transferring ownership or repurposing may require significant effort.

These characteristics mean businesses cannot quickly convert fixed assets into cash to meet short‑term needs.

Fixed capital vs. working capital

• Fixed capital: long‑term physical assets used to produce goods/services (illiquid, depreciable).
• Working capital: short‑term funds and liquid assets used for daily operations (cash, receivables, inventory, payables).

Both are essential for business health: fixed capital supports production capacity and long‑term growth; working capital ensures operational continuity.

How much fixed capital is needed to start a business?

The required amount depends on industry and business model:
* Capital‑intensive industries (manufacturing, telecom, oil & gas) typically require large fixed capital investments.
* Service firms (consulting, accounting) usually need far less—office space, computers, and basic equipment may suffice.

Considerations when estimating needs:
* Scale of planned operations and production capacity.
Lead times for procuring equipment and obtaining financing.
Redundancy and maintenance plans to avoid downtime from equipment failure.
* Expected useful lives and depreciation schedules.

Practical tips

• Create a detailed list of required assets and estimate acquisition and installation timelines.
• Factor financing costs and potential delays into startup plans.
• Plan for maintenance and replacement cycles; build reserves or insurance for critical equipment.
• Evaluate leasing vs. buying based on cash flow, tax treatment, and flexibility.

Bottom line

Fixed capital is the long‑term physical backbone of a business. Its nature and scale vary widely by industry, and it has important implications for liquidity, financing, depreciation, and operational risk. Together with working capital, fixed capital helps determine a company’s capacity to operate and grow over time.