Capital Budgeting Techniques Used by Small Manufacturing Companies

Maruf Hasan

doi:10.4236/jssm.2013.61005

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.

Highlights

One of the most important aspects of managing a company, besides leading it towards the vision of its owners, is the management of capital
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

Summary

Introduction

One of the most important aspects of managing a company, besides leading it towards the vision of its owners, is the management of capital. The use of capital budgeting techniques is an integral tool in capital management. Capital budgeting can be defined as the “total process of generating, evaluating, selecting and following up on capital expenditures”. Capital budgeting techniques would be the set of tools with which financial managers use to establish criteria for investing capital into available opportunities. A mistake in its capital budgeting process would cause a detrimental effect to the financial position of the company in the future. Depending on the needs and direction of the company, the financial manager is to apply capital budgeting techniques that would maximize the value of the company. The aim of this research is to ascertain where small manufacturing companies in Australia stand in regard to the use of capital budgeting techniques and risk analysis

Literature Review

Research Methodology