What is Capital rationing?

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Rationing basically means a process of controlled distribution of such resource which is scarce i.e. available in limited supply. The basic reason behind controlling the distribution process is to ensure that resource is distributed fairly and no one is left deprived of such resource or at least perception of deprivation does not arise.

The same concept is used in war times when food is rationed by the local or central government where each person is allowed a particular amount of food to be bough so that every person can have necessary amount of food and is not deprived of food just because food is in limited supply and one cannot afford it. This not only help in keeping the citizens’ morale high but also help in reducing the chances of anarchy in society.

Similarly in business terms, company may have many different investment options and all of them are so favourable that company wants to invest in all of them. But due to limited supply of capital either for short term or long term, management may have to control the investment decisions by imposing conditions. For example only those investment options will be considered which will increase the overall Return on investment (ROI# by certain percentage or that have particular Residual Income (RI) etc. This way company can buy the time to arrange additional capital and once circumstances get better then company may relax its investment conditions. As the capital gets short in supply, more stringent conditions are applied and as capital becomes easily available, conditions will become lenient.

This will not only help in managing the capital crises but also keep the staff motivated as now they will understand that if their proposal is not accepted then it is because conditions are not met. Also it will turn frustration of not being considered into a challenge where each department will have to come up with such ideas which will not only help their individual departments but also help in achieving overall business objectives.

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