Hello, what defines fixed assets and current assets? This makes it effective for financial management related to the efficient use of important economic resources, namely, capital funds. Capital funds can be used in two forms. Let us throw light on both these forms.
A major portion of the capital funds used for investing in the purchase of fixed assets for permanent or long-term purposes, for the purpose of diversification, expansion of business, renovation or modernization of plant and machinery and research and development and
The rest of the portion of funds needed for short-term purposes like investing in assets for current operations of the business is called working capital. For example, one who is managing a trading business has to arrange funds regularly for, purchase of finished stock and keeping it in the storeroom, and also find a suitable customer to go for sales.
On the other hand, if it is a manufacturing firm he has to arrange for funds continuously for, buying raw materials, keeping it for some time in-store, then taking it for the process of converting into finished goods, and ultimately selling it to consumers.
Fixed Asset Vs Current Asset
Now let’s know what is the difference between the two? Such as fixed asset investment vs. current asset investment. Come, it is important to know this. So that we can be clear. What is the response between fixed assets and current assets?
Of the two types of investments, investing in the current operations of the business is more difficult. And it is a continuous process. In which there is a continuous process with more components of assets than in the first case. And where the investment is one time or long term in the business process.
Furthermore, the purchase of immovable properties can only be by long-term sources of funds. But both long-term, as well as short-term sources of funds, are used to finance current assets. If so, what is the ratio of both long term and short term sources? If we decide the ratio, is it still fixed?
The answer is no. And this is an operational cycle, production policy, credit period, growth and expansion, change in the price level, etc. Like is flexible depending on the season? Improper working capital management can lead to business failure. Every many profitable companies fail. This is because their management team fails to manage working capital properly.
And they can be profitable, but they are not able to pay the bills. This is so because working capital management is not very easy. And the financial manager plays a very important role in it. Therefore, the following guidelines regarding concepts, components, types, and determinants will be very useful for the financial manager.
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