How to Calculate Capital Allocation
Businesses can raise capital (money) in two different ways: debt or equity. Management must then decide the best way to use this capital in order to grow the business. In this same vein, portfolio managers are given money to invest in securities. They can purchase stocks, bonds or some other investment product. In both cases, the process of deciding how to spend or invest capital is referred to as capital allocation, and it is usually calculated in percentage terms.
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Instructions
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Calculate the total value of capital received from investors. This includes all capital received (used or not) in the business or investment portfolio. Let's say you own a business that received a total of $100,000 over the past year.
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Determine what the funds were spent on. Some businesses may use the funds to purchase inventory while others will use it to pay employees and purchase investments. Others may choose to put the capital into a money market account (savings account) for use in the future. Let's say you decide to spend $50,000 on inventory, $25,000 on new business initiatives and $15,000 on private investments. You decide to put the remaining $10,000 in a savings account.
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Calculate the capital allocation. Divide the value of the invested capital by the total value of the total capital generated. For instance, the capital allocation for inventory is: $50,000 / $100,000 = .5 or 50 percent. The capital allocation for new business initiatives is: $25,000 / $100,000 = .25 or 25 percent. The capital allocation for private investments is $15,000 / $100,000 = .15 or 15 percent.
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