If a firm is experiencing no capital rationing, it should accept all investment proposals. It’s important to have a solid understanding of the capital/debt ratio, and how it relates to your firm’s capital allocation.
There are many reasons why firms aren’t capital-allocating. Some have had trouble maintaining their capital ratios; others have been unable to find capital investment opportunities. For a firm to be capital-allocating, it must be able to find the capital to invest in a project with a risk-adjusted return over a certain period of time.
Capital-allocation is a key part of how a firm sets up its capital budget. Firms tend to use the capital budget to look at their capital allocation, and how much capital they have available to invest in capital projects. That means they need to find the capital that’s available.
Capital-allocation is the process of looking at all the projects that are possible for a firm to make, and then dividing that capacity between them in proportion to their capital allocation.
It’s not uncommon for a firm to experience no capital allocation. However, if a firm is unable to get the capital to invest in capital projects, then capital investment is simply not going to happen. A firm needs to be able to access capital to invest into capital projects, and in order to do that you need to have available capital.
The firm has to make sure that by making a capital investment proposal, they can get enough capital to invest. It is not common for a firm to be unable to get enough capital to make any capital investment proposals.
In the past, many firms were unable to be capital intensive, and thus had to go through an allocation process. However, the recent capital investment rules have been more stringent. If a firm is experiencing no capital rationing, they should accept all investment proposals, even if the proposals are for the wrong type of capital.
The best thing that could do to help companies get a capital investment proposal is to avoid the risk of a firm jumping on a bandwagon. It’s something that almost everyone should do for a reason which makes no sense at all.
The problem is that firms that are experiencing no capital rationing can go to the capital investment rules and say, “I can’t accept any proposals that are for capital investment types that aren’t being rationed.” This will make the capital investment rules even more restrictive. This is why the best thing to do is to avoid the risk of being on a bandwagon.