Capital Rationing for Small Businesses: Budgeting & Project Prioritization

Small business owners should budget capital expenses to limit the number of new projects they will take on until their previous projects have paid off. This step, called capital rationing, is necessary when you have overextended your business through multiple new investments that have yet to come to fruition. Instead of continuing to spread your budget in hopes of turning a profit, you would be wise to cut back on new investing for a while.

Small Business Capital Rationing Example

Your small business purchases real estate in depressed areas to refurbish for rent. You have purchased three buildings, and you expect to earn a 50 percent return on your initial expense within two years. Rents drop due to a small recession in the area, and you have earned only a 20 percent return on your investment. You may set a limit on new projects until your initial goal is reached.

Capital Rationing to Prevent Bankruptcy

If you continue to invest without seeing expected payoffs, you may be doing what is commonly called chasing profits. Each dollar you earn on a future investment is simply allocated toward the gap in profits on a previous investment, putting you in a constant cycle of failing to meet returns. This can lead to bankruptcy if it goes on long enough.