ASSESSING CAPITAL REQUIREMENT NEEDS

  • Capital refers to the total investment of money, tangible assets like buildings, and intangible assets like goodwill.
  • Capitalisation is the amount and types of long-term financing used by a firm. Types of financing include common stock, preferred stock, retained earnings, and long-term debt
  • Firms can either be over capitalized or under capitalized
  • Capital of a firm includes fixed capital and working capital.
  • Capital needed to acquire those assets which are used for production purposes for longer period of time and which are not acquired for selling purposes is termed as fixed capital or block capital. Obvious examples of fixed capital are capital for purchasing land and buildings, furniture‚Äôs and fixtures and machinery and plant.
  • Such capital is required usually at the time of establishment of new enterprise. However, existing undertakings may also need such capital to finance expansion and development programmes and to affect replacement of equipment.
  • Initial planning of fixed capital requirements is made by the promoter. For this purpose first of all, he prepares a list of fixed assets to be needed by the firm in consultation with his colleagues and technical experts associated with that line of business. Thereafter, cost of these assets is estimated.
  • There is generally no problem in getting information regarding value of land. Cost of construction of building could be surmised with the help of building contractor. Value of plant and machinery could be determined by obtaining price list from their manufacturers. If the costs of different fixed assets are summed, the resulting figure would be the total of fixed capital requirement of a new undertaking.
  • Planning fixed asset requirements is the most difficult task which calls for greater acumen and skill on the part of the projector. This is essentially because of relatively high cost of the fixed assets as compared to current assets and any errors resulting from the acquisition will have long-term adverse effect on financial health of the enterprise and so also its profitability. Furthermore, risk factor is greatly associated with investment in fixed assets.
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