Fixed and working capital are both vital to a small business. Fixed capital includes the assets or investments needed to start and maintain a business, like property or equipment. Working capital is the cash or other liquid assets that a business uses to cover daily operations, like meeting payroll and paying bills.
While both fixed and working capital are necessary for running a successful business, they are two distinct types of capital.
What Is Fixed Capital?
- Fixed capital includes property, facilities, equipment and tools that your business uses on an ongoing basis. Entrepreneur lists some additional examples of long-term assets.
- These assets, such as vehicles, real estate, commercial ovens and construction equipment, are not easily liquidated (or turned to cash) but they may be resold and reused at any time.
- Fixed-capital investments are usually depreciated on the company’s accounting statements over a long period of time, but can sometimes be deducted all at once with the Section 179 deduction.
What Is Working Capital?
- Working capital is the difference between a company’s current assets (what you have) and liabilities (what you owe).
- This figure measures how efficiently you’re operating, your company’s liquidity, and its short-term financial health.
- Working capital allows a business to expand. Without working capital, it’s difficult for a company to grow, pay off debts and become (or remain) profitable.
- When small business owners come up short on working capital, they often turn to working capital loans to fill the gaps.
Your company’s fixed capital or assets can help ensure its long-term health, as it needs these assets and investments to continue operating and serving customers. Your company’s working capital, on the other hand, ensures its short-term health; if you have cash or other liquid assets on hand, you can restock inventory, pay your employees on time, pay taxes and meet any other frequent obligations.