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How do I Create a Plan for Capital Rationing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 September 2016
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    Conjecture Corporation
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Putting together and following a viable capital rationing strategy is important to the process of keeping a company financially stable. The idea behind the rationing is to make sure that resources are allocated efficiently so that the company is positioned to earn the most returns for its efforts. Drafting a workable capital rationing strategy involves understanding which resources are available for allocation, setting priorities for the use of those resources, and limiting the number of active projects so that the best overall returns are earned from those projects.

When it comes to business budgeting, capital rationing aids in making sure enough resources are allocated to each line item considered essential to the business operation. As part of the process, the business must determine which of those line items are most important to the production of goods and services. For example, a business would consider the maintenance of basic utilities to be a priority, since most businesses cannot operate without some source of electricity and communications. In addition, purchasing high-quality raw materials that result in the production of high-quality products to sell would also be important. These expenses would be considered more important than any expenses that were not directly involved in the production effort.

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When capital rationing is applied to the process of selecting investment opportunities, this same general approach is employed. Here, the investor will consider the amount of disposable funds available for new investment projects, with disposable funds being understood as money that the investor can afford to lose if the opportunity does not perform as anticipated. From there, the investor will consider different investments, prioritize them based on the potential for success, and then allocate a portion of those disposable funds toward securing a hand-picked number of investments. Care must be taken to not concentrate too much money on any one investment or even to take on too many different investments, if the strategy is to result in generating a decent level of return.

At its core, the process of capital rationing requires putting together a systematic and logical plan of action of how to use resources on hand to generate greater wealth. Only by understanding the resources that can be used in the plan, prioritizing the expenses or opportunities to best advantage, and then following the plan closely will the effort result in success. As with most approaches that involve careful allocation of resources, the process of capital rationing requires continually re-evaluating circumstances and tweaking the plan in order to avoid losses and improve the chances for generating a decent level of return.

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