(c) Capital rationing
Capital rationing is when a business has a limited amount of funds available to invest and the funds
available are insufficient to invest in all the potential projects under consideration. Projects therefore
have to be ranked on the criteria of which use funds most effectively.
Hard and soft capital rationing
Hard capital rationing is brought about by external factors such as an unwillingness of banks to lend
money, or lack of available funds due to capital markets being depressed. Soft capital rationing is
brought about by internal factors such as unwillingness of management to issue further share
capital or restrictions in the company's articles on the amount of borrowing the business can have.
Restriction of expenditure
A business may deliberately choose to restrict its expenditure because it does not wish to raise the
funds necessary to support extra expenditure. Management may be unwilling to issue extra funds for
the following reasons.
(i) Issuing additional share capital may lead to outsiders gaining control of the business.
(ii) Issuing additional share capital may lead to a dilution in earnings per share for current
shareholders.
(iii) Issuing additional debt capital may commit the company to unacceptably high interest
commitments.
Management may also wish to exercise strict control over expenditure by using tight budgetary limits
or other limits, only choosing projects with significant rates of return and low or non-existent
possibilities of loss. |
