Working capital vs. fixed capital: Striking the right balance

The art of managing the different financial pillars of your business requires precision. Understanding not just the difference between working and fixed capital but how to maintain equilibrium between the two is often the key to long-term, sustainable growth in today’s markets.

If you’re unsure how to differentiate working capital and fixed capital at your business, this guide is for you. Together, we’ll tackle this topic to help you improve your financial oversight and find the funding you might need in times of diminished working capital. 

The difference between working capital and fixed capital

Building a resilient financial structure requires a thorough understanding of working versus fixed capital. 

Working capital refers to funds available for day-to-day operations and short-term financial obligations. 

To calculate your working capital, you simply subtract your current liabilities from your current assets. Having adequate working capital ensures you can meet immediate business expenses and keep your company financially stable as you grow. 

Fixed capital (also called fixed assets) refers to long-term assets that support the company’s ongoing operations, such as property, machinery, and infrastructure. 

Unlike working capital, fixed capital is not easily convertible into cash. Fixed capital investments are strategic decisions aimed at enhancing productivity, efficiency, and capacity for future growth.

A working capital ratio (current assets divided by current liabilities) of less than one typically indicates liquidity problems, while a 1.5 or higher ratio indicates your company’s financial stability. 

Finding the right balance of working capital and fixed capital at your business

Finding the right balance between working capital and fixed capital can ensure your business’s operational efficiency, financial stability, and long-term growth. 

Performing a thorough assessment of your company’s financial situation can help you better understand and balance your working and fixed capital. Looking at details like cash flow patterns or accounts payable/receivable cycles, you can uncover the true cost of your business and determine the ideal level of working capital to support your day-to-day operations. 

For companies facing hefty short-term expenses (for example, startup costs, property investments, etc), business lending provides an opportunity to boost working capital temporarily. 

In instances where your working capital falls short, taking out a working capital loan can provide you with immediate access to the funds you need to cover operational expenses, manage cash flow fluctuations, and seize growth opportunities. However, if you don’t make the payments back on time, you can also face hefty fines.

Achieving the right balance between working capital and fixed capital ultimately requires ongoing monitoring and adjustment as your business grows and expands. With a mixture of thorough financial assessments and smart business lending decisions, you can optimise your financial resources for success. 

Choose Funding Options by Tide for your working capital financing needs

At Funding Options by Tide, we connect businesses with lenders offering working capital loans. 

Matching you with more than 120 lenders, Funding Options by Tide allows you to compare different loans and financing options to find the best solution for your business.  

Get started today to get matched with a suitable lender.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.