Capital Budgeting Practices Research Articles

SMEs Capital Budgeting Practices: A Review Article

This study aims to conduct a comprehensive systematic review of the existing literature on capital budgeting practices (CBP) in Small and Medium-Sized Enterprises (SMEs). By analyzing 130 academic publications from 1964 to 2024, we seek to identify key trends, gaps, and emerging themes in this field. Our analysis reveals a substantial body of research focusing on CBP in larger corporations but highlights a significant dearth of studies specifically examining SMEs, particularly in developing economies. Despite the value of existing research, the current review underscores the need for further exploration of CBP within SMEs. A critical area of inquiry is to understand how SMEs' CBP differs from those employed by large firms and the underlying reasons for these discrepancies. By revealing the unique challenges and opportunities faced by SMEs, this study contributes to the knowledge pertaining to the development of more effective financial management strategies tailored to their specific needs.

Capital Budgeting Implementation by Public Sector Construction Firms in Tanzania’s Housebuilding Industry: An Exploratory Study

This exploratory study investigates the implementation of capital budgeting practices (CBP) by selected public sector construction firms (PSCF) in Tanzania. This investigation seeks to assess the extent, to which such practices are used for effective investment decision-making, with a particular focus on the country’s housebuilding sector. A case study research design was adopted to collect data from five Tanzanian PSCF, serving as cases through a mix of questionnaires, interviews and document reviews. The emergent data was analysed using thematic analysis. An appreciable level of CBP implementation was observed in all the cases. The internal rate of return (IRR), net present value (NPV) and payback period (PBP) capital budgeting techniques (CBT) were observed to be mostly used by these PSCF, while sensitivity analysis was widely deployed for risk mitigation. The influence of top management in decision- making, political influence and lack of advanced software were some of the implementation challenges identified. The findings contribute to the elucidation of CBP implementation praxis in the public sector organisation context in developing countries, as it relates to the housebuilding industry in Tanzania’s unexplored context. The study proves to be a valuable resource for public sector entities in developing countries intent for facilitating effective investment decision-making about infrastructure procurement and it contributes to improving knowledge of CBP implementation, consideration of risk mitigation factors and post-project implementation audits by public sector firms.

A study on capital budgeting with reference to micro, Small and Medium Enterprises (MSMEs) - Lilongwe City, Malawi

Capital budgeting involves planning and controlling long-term and short-term investments in fixed assets. It requires investing cash now with the expectation of recovering it over more than a year. Evaluating these decisions means assessing the investment and its future cash flows, which come from added revenues, cost savings, or cost reductions. Most numbers used in these analyses are estimates. Capital investment decisions are crucial for organizations' strategic goals. This study explores the capital budgeting practices of MSMEs in Malawi by surveying ten manufacturing companies. Results show that 70.3% of these MSMEs use capital budgeting for short- and medium-term investments, often employing forecasting analyses, and some use cost-benefit analysis and executive decision-making. Most MSMEs struggle with capital budgeting due to limited knowledge, time constraints, and data issues. While 50.9% understand the "Decision Rule" in capital budgeting, 40% cite lack of knowledge as their biggest challenge, followed by time, manpower, and data availability. Capital budgeting in Malawian MSMEs is developing as they adapt to globalization's opportunities and challenges. It is therefore suggested that the Malawian government, non-governmental organizations, and business development providers should offer training in capital budgeting and proper business record-keeping to Malawian Micro, Small, and Medium Enterprises.

Challenges and Opportunities in Adopting Capital Budgeting Practices

This study aims to examine the obstacles and potential advantages that small and medium firms encounter when using capital budgeting techniques. The present study employs a design that involves doing a comprehensive literature analysis to analyze various papers and prior research. The present study reveals a number of problems encountered by small and medium firms in the process of adopting capital budgeting techniques. One of the most significant obstacles that has a profound impact is the deficiency in understanding capital budgeting. The implementation of capital budgeting procedures is infrequently observed among small and medium firms, resulting in limited impact. Despite the potential benefits it offers to the development of small and medium firms, capital budgeting facilitates crucial decision-making processes pertaining to investments, long-term planning, and investment assessment for business owners. The practical implication of this study suggests that owners of small and medium firms should consider enhancing their financial knowledge or seeking professional experience in the areas of finance and management.

Tekanan Fiskal dan Keberlanjutan Penganggaran Modal pada Sektor Pemerintah: Pendekatan Tinjauan Literatur Sistematis

Fiscal stress faced by local governments over the years can be a threat to the sustainability of capital budgeting in providing public goods and services. The purpose of the research is to map the trends of scientific publications and the most prominent types of research, and to synthesize research results on the relationship between capital budgeting practices and fiscal stress in the government sector. The method be elected in this study is a systematic literature review with reviews and analyzes systematically the effect of fiscal stress on the sustainability of capital budgeting published in reputable international journals indexed by Scopus. Based on the results of the study, it was found that: first, the first research on the relationship between capital budgeting and fiscal stress was carried out in the 1980-1989 time period. Then research on this topic is increasing in the period 2000-2020. Second, the most dominating type of research is quantitative (63%). While the remaining 37% are qualitative studies. Third, the development of research results on the relation among capital budgeting and fiscal stress in the government sector still gives different responses among researchers. This study contributes to providing a comprehensive review of the development capital budgeting research in a situation where the government is facing fiscal stress, and is useful for practitioners in allocating resources for the sustainability of capital budgeting in the government sector.

Capital Budgeting Practices: A Survey of Two Industries

This research examines the capital budgeting practices used by small and medium-sized firms (SMEs) in two Portuguese industries, footwear and metalworking, aiming at answering the following research questions: How much knowledge do managers have about capital budgeting practices? What are the most used practices? How much importance do they attribute to applying them? The research was conducted through an online survey with a response rate of 14.9%. The results document that most companies in both industries are familiar with capital budgeting practices, despite differences between the two. The footwear industry recognizes the importance of these indicators but makes little use of them, and many companies prefer using payback period (PBP). The metalworking industry, on the other hand, makes greater use of capital budgeting practices, with net present value being the favored indicator and PBP being used as supplementary. This study contributes to the capital budgeting literature in two ways: first, by focusing on SMEs instead of only large firms, and second, by exploring data from two industries rather than multiple, heterogeneous industries.

The Impact of Working Capital Management on Financial Performance, Evidence from Automotive & Components Industry

This study aims to examine and analyze the impact of Working Capital Management by measuring the Days Inventory Oustanding (DIO), Days Sales Outstanding (DSO), and Days Payable Oustanding (DPO) on Return on Assets (ROA) in automotive and component sub-sector firms listed on the IDX from 2011 to 2021. The sampling technique employed was a purposive sample of 11 businesses with 121 observations for 2011-2021 in the IDX-listed automotive and component sub-sectors. Panel data regression using the Common Effect Model is the method of analysis used. The results of this study reveal that the DIO and DPO have a significant negative effect on ROA, whereas the DSO has a positive effect. It is recommended that, while formulating optimal capital budgeting practices, businesses consider Working Capital Management. This paper's findings may help firm managers optimize their working capital management practices. The study's identification of working capital management as a substantial influence on firm profitability can interest policymakers.

Capital budgeting methods - The practices of Polish companies listed on the Warsaw Stock Exchange

Purpose of the study: In this study, the authors analyzed of the use of capital budgeting methods (CBM) by Polish companies listed on the Warsaw Stock Exchange (WSE). The study's main objective was to investigate the practice of capital budgeting in companies operating in Poland and listed on the WSE, especially to analyze the dispersion of capital budgeting methods and the factors influencing their selection.
 Methodology: For achieve the research objectives, a survey method was chosen. The authors received 34 correctly completed questionnaires (from 252, the return rate was 13.5. Descriptive statistics and multiple regression analysis with the use of Statistica were used in the study.
 Main Findings: The survey indicated that CBMs are relatively frequently applied in particular; IRR was used (often or always) by 64.7 per cent of companies and NPV by 60.6 per cent of companies. The analysis of company characteristics shows that the use of CBM is influenced by the origin of equity, managerial ownership, employment, and foreign sales (all independent variables are statistically significant).
 Applications of the study: The authors believe that the study's results will be of interest to researchers in other countries and will fill a gap in the management accounting literature. The study's results may also be useful from a practical point of view.
 Novelty/Originality of the study: The survey shows a large sample of companies, what CBMs are used by Polish companies and how often they are used. A broader set of explanatory variables was also used, which allows for a comprehensive description of campaign practices and makes it possible to analyze whether and which companies' practices are consistent with previous studies.

Capital budgeting and Kelly betting

Capital investments are easily interpreted as bets and vice versa. The mathematical theory of betting, often known as ‘Kelly betting’, has implications for all financial decision-making under uncertainty. There have been attempts to exploit Kelly betting methods in financial portfolio optimization, but there has been little analysis of conventional capital budgeting methods against a Kelly framework. A simple comparison between methods reveals that capital budgeting decisions made using conventional finance methods can embed the error that Kelly theorists call ‘overbetting’. The outcome of overbetting is that the firm reduces its expected compound capital growth rate while simultaneously adding to the volatility of its anticipated growth path. That unfortunate pairing is mathematically precluded under Kelly betting rules but is implicitly, albeit unknowingly, sanctioned by accepted capital budgeting practices in finance. JEL Classification: G11, G12, G31

What restricts SMEs from adopting sophisticated capital budgeting practices?

What restricts SMEs from adopting sophisticated capital budgeting practices?

한국기업의 투자분석 실태

Purpose This paper is concerned with reporting current capital budgeting practices of Korean firms with respect to the appraisal of capital investment projects, which was surveyed at the beginning of 2020. Methods Empirical research based on data from an e-mail questionnaire, designed around a factual and attitudinal survey. Results The survey result shows that the responding firms use an internal rate of return(71.7%), a net present value(62.2%), and a payback period(62.2%) technique. Also, it shows that the payback period technique has a close relationship with an R&D expenditure at the significance level of 5%. Conclusion It is explored that Korean firms shows the usage of investment project appraisal techniques similar to western firms, but much different from Japan and China.

Determinants of Sustainable Capital Budgeting Practice: A Structural Equation Modelling Approach

Across the globe, capital budgeting – the planning process of appraising an organisation‟s long term investments for funding – plays a pivotal role in economic growth by providing the platform for mobilising long-term funds for economic development. Capital budgeting practice refers to the aggregate tools/techniques for strategic investment decisions under risk and uncertainty conditions (Desai, 2019; Hillier et al., 2021). It involves a large cash outlay, expecting a future stream of benefits/income/return. Existing research suggests that financial and non-financial considerations influence managers‟ choices of CBTs across nations (Batri & Verma, 2017). One of the significant concerns of Oman‟s Ninth five-year development plan 2016-2020 is its focus on achieving a private sector-driven economy enabled by public-private partnership (PPP) projects and related growth strategies that will drive non-hydrocarbon and more excellent employment opportunities for the Omani nationals. To this end, the manufacturing sector is at the centre of Oman‟s Top 7 Sectors comprising other critical industries, including Construction, Wholesale and Retail Trade, Agriculture and Forestry, Real Estate and Business Activities, Private households with Employed Persons, and Hotels & Restaurants (MoCI, 2014). However, there has been very little academic research on capital budgeting with a focus on the manufacturing industry of Oman. Keywords: Advanced capital budgeting techniques (ACBTs), Confirmatory factor analysis (CFA), Oman, Real options valuation (ROV), Structural equation modelling (SEM).

National development level effects on capital budgeting practices: a comparative study of nature vs nurture

Purpose This research should help determine whether development should focus on individual firms or will raising the national development level act like a rising tide and raise the performance of all corporations. Design/methodology/approach The comparative data used in this study come from 150 Australian (ASX200 index listed) firms and 150 Sri Lankan (Colombo Stock Exchange listed) firms. The research questions are answered via a quantitative research design that uses primary and secondary data. Findings The findings demonstrate that capital budgeting practices are more influenced by contingency features and sophistication in Australia and Sri Lanka. Also, Australian firms tend to use capital budget models with good-to-strong predictive power (except for ROE) and Sri Lankan firms tend to use capital-budget models with fair-to-poor predictive power. Further, the analysis of Australian firms yielded much stronger and more statistically significant results than the analysis of Sri Lankan firms. Practical implications In complex real-world situations, reconciling the outputs of a multifaceted approach to capital budgeting methods is more likely to give the depth and width of input needed to achieve an optimal capital investment plan. Originality/value The results of this study can provide rich information for stakeholders about new findings in capital budgeting (CB) practices and their contributions to firm performance in a comparative perspective.

Five decades of research on capital budgeting – A systematic review and future research agenda

This study synthesizes and reviews the existing literature on capital budgeting (CB) practices and their application to theories, contexts, characteristics and methodology. It aims to identify the prevalent issues and gaps in the literature and provide potential avenues for future research. After comprehensive search and rigorous scrutiny, this review encompasses 185 articles. A systematic literature review (SLR), triangulated with the bibliometric method, is carried out, adopting a meticulous approach to achieve a comprehensive overview of the field. Based on cluster analysis, four distinct themes are identified. Additionally, a conceptual framework is developed that shows the antecedents, moderators and outcomes of research on capital budgeting. Grounded on the detailed content analysis, 11 actionable future research directions are proposed to advance this field of research.

Capital budgeting practices and political risk: evidence from Lebanon

PurposeThis paper aims to examine how capital investment projects are appraised in Lebanon; whether the risk is incorporated into this process by Lebanese firms and the impact of political risk on the capital budgeting process.Design/methodology/approachThis paper uses a questionnaire survey to investigate the capital budgeting practices of companies located in Lebanon, which is a country characterised by a high level of political risk.FindingsLebanese companies tend to use more than one method of investment appraisal and, increasingly, they are using sophisticated discounted cashflow techniques alongside the payback period. The most widely used methods to evaluate risk include scenario and sensitivity analysis. Finally, political risk plays an important role in the capital budgeting processes of Lebanese companies.Originality/valueThe paper reports on whether the methods of capital investment appraisal used throughout advanced Western economies are used in the context of an emerging economy. In addition, Lebanon is an ideal research site to study capital budgeting as the conflicts in the country of the past 50 years have required sizeable new expenditure on capital projects; the country is characterised by high levels of political risk which may lead corporate managers to use different approaches to investment appraisal and it provides an opportunity to study capital budgeting decisions by private, unlisted firms.

Use of capital budgeting practices: an integrative review

This article aimed to highlight the relationships between these characteristics and the use ofcapital budgeting practices. For the selection of articles published on “capital budgeting” it wasused the Proknow-C tool. It was found that the theory-practice gap is both related with the organizationaland managerial characteristics from the practical point of view, but requires a reviewby academicians. Organizations should seek professionals with experience in capital projectsappraisal and who are familiar with and knowledgeable in the use of adequate practices for decision-making. This research contributes by indicating the research gaps that need to be explored by researchers and by trying to identify the difficulties found by managers that interfere in the capital budgeting results.

Legacy Effect of Soviet Budgeting System on Public Capital Budgeting: Cases of Russia, Moldova, and Uzbekistan

ABSTRACT This comparative study uses the legacy effect of the Soviet past to explain the changes in public capital budgeting and management in the three former Soviet republics: Russian Federation, Moldova, and Uzbekistan. The main argument is that the legacy of the Soviet planning and budgeting traditions in forms of the centralized control, inadequate capital planning, and strong informal powers of political elites are embedded in the capital budgeting and management practices of the case countries. The analysis reveals that regardless of the differences in the countries’ socio-economic characteristics, political regimes, and institutional developments, the budgetary outcomes are consistently shaped by the public management principles rooted in the Soviet budgeting traditions. The study findings are significant to the field of International Public Administration, Post-Soviet Affairs, and Public Finance because they disclose the legacy effect of the Soviet practices on the implementation of public administration reforms in post-communist countries. By exploring areas in international public capital budgeting and investments, this study also attempts to address the gap identified by public finance scholars.

A study on capital budgeting practices of some selected companies in Bangladesh

Purpose The purpose of this paper is to investigate the current capital budgeting practices in Bangladeshi listed companies and provide a normative framework (guidelines) for practitioners. Design/methodology/approach Data were collected with a structured questionnaire survey taking from the chief financial officers (CFOs) of companies listed in the Dhaka Stock Exchange in Bangladesh. Garnered data were then analyzed using descriptive and inferential statistical techniques. Findings The results found that net present value was the most prevalent capital budgeting method, followed closely by internal rate of return and payback period. Similarly, the weighted average cost of capital was found to be the widely used method for calculating cost of capital. Further, results also revealed that CFOs adjust their risk factor using discount rate. Originality/value The findings of this study might help the firms, policymakers and practitioners to take a wise decision while evaluating investment projects. Additionally, this study’s findings enrich the existing body of knowledge in the field of capital budgeting practices by providing more reliable and comprehensive analysis taking samples from a developing economy.

Shadow prices for intangible resources

PurposeFocusing on managerial problems related to the measurement of intangibles, this paper develops and validates a hedonic-pricing methodology for the evaluation of the intangible resources of companies obtaining their shadow prices.Design/methodology/approachThe paper adapts a hedonic-pricing methodology developed primarily for markets in real estate and secondhand cars to define how much intangibles may contribute to companies' market value. A certain calibration of the original tool has been developed to make this methodology appropriate for interpretation and practical use. The main advantage of this approach is that it allows for an evaluation of the shadow prices of intangible resources. These prices can be interpreted as the market value of the intangible resources which are not reflected on the balance sheet.FindingsThe results of this study demonstrate that hedonic pricing with a self-selection correction generates robust estimates. As one can see, the positive contribution of a high endowment of intangibles for all shadow prices is confirmed through estimations using two different techniques. Meanwhile, the negative effect of a low endowment is even more evident for the baseline model. This model shows consistent negative shadow prices for the majority of underinvested intangibles. Brands have the highest shadow prices in the introduced models; human capital, as measured by the qualification of top management and investments in employees, has likewise demonstrated high prices. However, most structural resources seem to be not reflected to a large degree in companies' market value.Practical implicationsThis paper brings new opportunities to obtain the monetary value of intangible resources based on estimated market prices of a corporation's resource portfolio. These prices may be used for several purposes – for example, benchmarking for performance management, capital budgeting or knowledge-management practices. Moreover, by having methodological value, this study opens ways to evaluate any other intangibles which are not explicitly discussed in the empirical test of this particular study.Originality/valueThis study primarily contributes to the methodological advancement of evaluation of corporate intangible resources. It departs from the conventional hedonic-pricing mechanism to identify cogent estimates to intangibles in monetary terms. Importantly, this mechanism implies individual shadow prices for specific intangible resources which makes the contribution of this study unique for the existing literature, both within resource-based and value-based views.

Practices of Capital Budgeting Techniques in Manufacturing Enterprises in Kathmandu

The research has been carried out on capital budgeting practices in Manufacturing Enterprises, Kathmandu district with the aim to analyze and evaluate the capital budgeting practices applied by manufacturing firms in Kathmandu district. To accomplish the objective, descriptive research is the process of accumulating facts. The research is to be based on the information of the sample companies through structured questionnaires. For the data analysis and interpretation, percentage was used according to the nature of the data.
 The application of CB techniques is useful only for large types of organization. Small types of organizations do not want to evaluate project by using CB techniques. Most manufacturing enterprises get advantages after implementation of the CB evaluation techniques. Organizational objectives can be achieved through effective management and use of CB techniques. Most of the sample companies in Kathmandu district are not foregone profitable investment opportunities in view of some limit imposed on the size of capital budget.