Capital Budgeting Techniques Used by Small Manufacturing Companies

Abstract

Small companies account for 40% of Australian jobs and yet most of the studies on capital budgeting techniques have been focused on large firms. A mistake in their capital budgeting process could lead to disastrous consequences as they do not have the financial clout to recover from them. The purpose of the paper is to investigate where small manufacturing companies in Australia stand in regard to the use of capital budgeting techniques and risk analysis. The research concludes that while there is an indication of usage of the Payback Period with Discounted Cash Flow (DCF) techniques, there is a need for more frequent usage of risk analysis as well as management sciences which is found lacking in the capital budgeting process of small companies.

A survey of capital budgeting practices used by firms in Barbados

“…Table IV reflects this ranking with PBM as the highest ranked (M = 2.37). This is consistent with other studies such as Leon et al (2008), Chittenden and Derregia (2015), Kocher (2007) and Hasan (2013) which indicate that PBM is more widely used than any other method. Additionally, prior studies conducted by Lazaridis (2004), Burns and Walker (1997), Verma et al (2009) and Batra and Verma (2017) also reveal that the three dominant methods are the PBM, NPV and IRR.…”

“…Some studies have noted that the PBM is more widely used than any other method (Leon et al, 2008;Chittenden and Derregia, 2015;Kocher, 2007;Hasan, 2013) and also tends to be more preferred (Miller, 1960;Schall et al, 1978;Pike, 1996;Block, 1997;de Souza and Lunkes, 2016). The reasons for the selection of the PBM may be its simplicity, liquidity being the focus of many firms, as well as pressures from financial institutions, in terms of the length of time the debt will be repaid (Block, 1997).…”

“…Additionally, if care is taken in the selection of capital investments, then there is a greater probability that positive impact will be made to the organisation's performance. From a regulatory perspective, the selection of incorrect projects and investments can result in mistakes that are financially unfavourable to the firm and the entire body of stakeholders (Hasan, 2013).…”

“…As a result, much attention has been placed on the importance of capital budgeting, as there is the general argument that capital budgeting decisions are one of the most important decisions, if not the most important decisions which corporations have to make (Hasan, 2013;Correia, 2012;Viviers and Cohen, 2011;Bennouna et al, 2010;Harris and Raviv, 1996;Koch et al, 2009;Shinoda, 2010). This argument is further supported by Ghahremani et al (2012) who note that capital budgeting decisions are the only decisions that have the effect of creating instability within a company and the entire financial system, while Bennouna et al (2010) note that capital budgeting is essential to a firm's success and survival.…”

Faktor-Faktor yang Memengaruhi Penerapan Payback Period sebagai Teknik Penganggaran Modal pada UMKM di Kota Bogor

“…Penelitian Hasan (2013), Ahmed (2013), dan Barjaktarovic et al (2015) mengungkapkan bahwa payback period merupakan teknik penganggaran modal yang paling banyak dan sering digunakan UMKM. Payback period lebih disukai karena penerapannya yang lebih sederhana dan juga tidak memerlukan pakar dalam bidang keuangan (Hasan 2013). Selain itu, penelitian-penelitian tersebut juga mengungkapkan bahwa masih banyak UMKM yang tidak menerapkan teknik penganggaran modal apapun.…”