The company, in response to meeting its prime objective to maximize earnings, has to undertake several projects and undertakings which return a profit to the business as a whole. But for doing this, companies have to realize that which projects should be taken first and what should be its priority in this regard.
These projects should be filtered based on urgency and immediate response. Once immediate and urgently required projects have been separated they should be disposed of with utmost priority.
Prioritizing increases the success rates of strategic projects, increase the alignment and focus of senior management teams around strategic goals, clears all doubts for the operational teams when faced with decisions, and, most important, builds an execution mindset and culture.
Now the question is raised how to prioritize the available projects? One answer is given that is should be performed on need basis i.e. urgent tasks. If, however, there are certain projects in which company needs to invest and these projects have an equal level of urgency then how the company shall go for these projects?
The answer to the question mentioned above is possible through financial management technique known as “Capital Rationing.” As per the said technique, all the available projects which a company can undertake must be analyzed or appraised using investment appraisal techniques such as NPV or IRR. These techniques will result in a determination of those projects which have the ability to return to the company positively that is those projects which generate positive NPV and have a higher IRR over the benchmark rate. Once such projects are indemnified, these can be further appraised with the capital rationing technique.
Capital rationing technique is important to adopt when the company has limited finance available and want to undertake all of the positive NPV projects. This limited finance will entail company to decide which project should be forgone and which can be executed at first. For this company needs to identify the divisibility of the projects. If projects can be divided, then the project has higher profitability index can be chosen and those having lower profitability index can be forgone. In the case of indivisible projects, different blocks of projects shall be made to meet up the limited finance. The block which gives highest NPV cumulatively shall be selected, and others shall be kept for later use.
Apart from a financial management perspective, there is also a behavioral aspect which should be considered when choosing for the projects and when prioritizing them. This perspective details the risk appetite of the decision-maker. For instance, if a senior executive taking a decision is a risk taker, then he will be more willing to take more than one projects at a time and will certainly prioritize very little. However, if any person or executive is not taking many risks or has a very low profile regarding risks, then he will-will require prioritization strategy.
Prioritization at a strategic and operational level is often the difference between success and failure. But many organizations do it badly. Operationally, companies need to identify the areas where prioritization is necessary. Because operations are considered to have the major role in respect of company’s business. For example, if a company is engaged in producing two outputs and both outputs require a separate and stand-alone operation, let’s say five operations per product. And consider output 1 is more demanded as compared to output 2. In the given scenario, it can safely be assumed and prioritized that all five operations of output one should be considered and all five operations of output two should be delayed for a while. Further, strategic prioritization is essential as regards to the related objectives that should be achieved first.
In an overall sense, it can be concluded that prioritization is essential to enhance the overall productivity and for this, it requires analysis of separate financial management and behavioral aspects.
Related: How to Finance a Start- UP
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