Budgeting Methods Research Articles

PENGGUNAAN METODE DISCOUNTED CASH FLOW DAN UKURAN NON KEUANGAN DALAM PENGANGGARAN MODAL: PENDEKATAN KONTINJENSI

This study aims to (1) examine the degree of use between Discounted Cash Flow (DCF) method and non financial measures in capital budgeting (2) examine managers’ satisfaction on both methods when there is a contingency fit between those methods with two contingency variables: product standardization and firm strategy. This research used purposive sampling method to collect data. The research population was manufacturing firms listed in BEI and major non listed firms located in Jawa Tengah and got 35 responses. Multiple regression and Moderated Regression Analysis (MRA) were used to test the hypothesis. Research results indicate that (1) DCF method is not more important than non financial measures. Managers tend to use both methods simultaneously (2) firm strategy affects to DCF method and non financial measures significantly which it means that firms with prospector strategy tend to place more emphasis on non financial measures while firms with defender strategy tend to place more emphasis on DCF method. (3) product standardization has no effect on both methods (4) firm strategy has a moderating effect on the relation between two capital budgeting methods and manager’s satisfaction on budgeting process while product standardization has no effect.

The Necessity of Applying Accrual Accounting In Establishing performance Budgeting System (An Analytical Study)

Nowadays, governments have considered the novel management approaches, namely modifying their budgeting systems into performance-based ones due to the increasing pressure to enhance responsiveness and performance transparency. Hence, operational budgeting, as the most optimum accepted method of budgeting, has been put under the spotlight of governments. The differentiating character of this system from the traditional systems is its focus on the objectives, consequences and calculating the actual cost of activities, reducing the costs and improving the quality of services provided for people. Planning and successful execution of operational budgeting system has a strong correlation with the characteristics of the governmental accounting system and financial reporting. An important prerequisite for reconciliation of the budgeting system is to modify the accounting system, so that it could calculate the actual price. Development and implementation of the operational budgeting in the governmental agencies requires application of accrual accounting in order to determine the actual costs of programs and activities. In this research, operational budgeting and accrual accounting were addressed with an analytical approach and the necessity of establishing accrual accounting, as a prerequisite for implementation of the budgeting on an operational basis was emphasized

Investment Decisions on Long-term Assets: Integrating Strategic and Financial Perspectives

This paper aimed to verify how companies formalise the decisions and control on long-term investments. In particular, an analysis of the published literature reveals a relevant gap between the strategic and financial perspectives in addressing this issue, and Agency Theory was proposed as a linking construct to bridge this gap. A survey was conducted among 82 companies, and the data were treated using the structural equation modelling technique. The results of this survey indicate that firms with intensive external funding use sophisticated capital budgeting methods more frequently when evaluating the profitability of their long-term investment proposals. As these methods require detailed information, these firms use additional appraisal mechanisms to conduct their investment analysis more frequently. Additional mechanisms are also used if the long-term investment is funded by external sources and perceived as a riskier investment. These deeply analysed long-term investment proposals often appear and are decided as a part of the strategic planning process instead of being strongly associated with the budgeting process. Finally, these long-term investments, which are funded externally, analysed using sophisticated methods and mechanisms and decided as a part of the strategic planning cycle, are more tightly controlled than other investments. These findings help to reduce the heuristics within the related literature.

Crisis Caused Changes in Intrinsic Liquidity Value in Non-profit Institutions

Liquid assets which non-profit institutions hold are not a source of any special interests and although the close to cash assets together with credit lines available for non-profit institution are connected with resigning from realizing a part of income or costs, non-profit institutions decide to hold some liquidity reserves. This results not only from transactional needs, but also from precautional and speculative reasons. Investment in liquid reserves resulting from speculative demand for money may be assessed by usage of capital budgeting methods. In the paper, each of these aspects of liquidity was taken into consideration and presented from non-profit perspective. Non-profit liquidity value determination may often significantly contribute to the solution of working capital management problems in these institutions.

Application of Break-Even Revenue Concept in Assessment of Investments Generating Time-Limited Free Cash Flows

In spite of the fact that capital budgeting methods are widely discussed in financial literature, there are still difficulties with the theory implementation in practice. The reasons for this situation are easy to identify. In case of the methods of preliminary analysis (eg. payback period, break-even point) the very far-reaching simplification are indicated. On the other hand the use of more advanced methods (e.g., NPV, EVA) requires expertise in free cash flows and discount rates forecasting, the skills which are not very common among managers responsible for investment decisions. The article presents a method developed by the authors which combines different tools. The created method gives an easy to interpret information about value of sales which guarantees NPV equals 0 in a given period of analysis.

Risk Management and Portfolio Budgeting Based on ARMA-GARCH Non-Gaussian Multivariate Model

In this work, we propose an ARMA(1,1)-GARCH(1,1) model with standard classical tempered stable (CTS) innovations for historical daily returns of 29 selected stocks. The non-Gaussian nature of the innovations captures the fat-tail property observed in data. The dependency between different assets is modeled by a student’s t copula. We fit the data and estimate the parameters of the model and perform statistical goodness-of-fit tests for fitted parameters. Based on the multivariate model consisting of standard CTS marginals and student’s t copula, we construct ARMA-GARCH Monte-Carlo paths for daily returns of each single stock. Daily VaR is computed for an equally weighted portfolio, and for a time span of 250 trading days, the model is being backtested. It is shown that in comparison with the Gaussian model, the proposed CTS-t copula offers more realistic estimation for the portfolio risk. Moreover we study the portfolio selection problem. We compute the marginal VaR and Component VaR of single stocks for the VaR optimized portfolio. We consider an active portfolio budgeting method, where we change the portfolio composition according to marginal VaR measurements. We show that the resulting portfolio converges to the VaR minimized portfolio in the 29 dimensional space of portfolio weight vectors. We perform a return to VaR ratio, performance test, to realize the ”costs” of this risk reduction action in terms of potential return suppression. Little transaction costs due to limited and relatively small position modification in portfolio, presents an efficient management scenario for pension funds and other investment organization, where relative changes in investment positions are restricted.

An analysis of capital budgeting methods, the cost of capital and decision-makers in listed South African firms

This study’s purpose was to link the length of decision-makers’ employment in a firm and their academic qualifications to their choice of capital budgeting methods and of cost of capital techniques. The results show that the net present value (NPV) is more popular than the internal rate of return (IRR) as a capital budgeting technique. Also, irrespective of how long respondents have been employed by a company, they all use a discount rate. However, there is a significant tendency among respondents with postgraduate qualifications to prefer the NPV as a capital budgeting technique. Thus, in South Africa, academic qualifications do play a role in decision-makers’ capital budgeting practices.

Crisis Caused Changes in Intrinsic Liquidity Value in Non-Profit Institutions

Liquid assets which nonprofit institutions holds are not a source of any special interests and although the close to cash assesses together with credit lines available for nonprofit institution are connected with resigning from realization of the part of incomes or costs, nonprofit institutions decide to hold some liquidity reserves. And not only this resulting from transactional needs, but also from precautional and speculative reasons. Investment in liquid reserves resulting from speculative demand for money may be assessed by usage of capital budgeting methods. In the paper, each of these aspects of liquidity was taken into consideration and presented from nonprofit perspective. Nonprofit liquidity value determination may often significantly contribute to the solution of working capital management problems in these institutions.

Economic analysis of alternative nutritional management of dual-purpose cow herds in central coastal Veracruz, Mexico.

Market information was combined with predicted input–output relationships in an economic analysis of alternative nutritional management for dual-purpose member herds of the Genesis farmer organization of central coastal Veracruz, Mexico. Cow productivity outcomes for typical management and alternative feeding scenarios were obtained from structured sets of simulations in a companion study of productivity limitations and potentials using the Cornell Net Carbohydrate and Protein System model (Version 6.0). Partial budgeting methods and sensitivity analysis were used to identify economically viable alternatives based on expected change in milk income over feed cost (change in revenues from milk sales less change in feed costs). Herd owners in coastal Veracruz have large economic incentives, from $584 to $1,131 in predicted net margin, to increase milk sales by up to 74% across a three-lactation cow lifetime by improving diets based on good quality grass and legume forages. This increment is equal to, or exceeds, in value the total yield from at least one additional lactation per cow lifetime. Furthermore, marginal rates of return (change in milk income over feed costs divided by change in variable costs when alternative practices are used) of 3.3 ± 0.8 indicate clear economic incentives to remove fundamental productivity vulnerabilities due to chronic energy deficits and impeded growth of immature cows under typical management. Sensitivity analyses indicate that the economic outcomes are robust for a variety of market conditions.

Determinants of capital budgeting methods and hurdle rates in Nordic firms

AbstractWe study the determinants for the choice of capital budgeting methods and the setting of hurdle rates (WACCs) in five Nordic countries. Combining survey data with a rich set of determinants, including ownership data, CFO characteristics, and financial data, we find that the use of the Net Present Value method and the sophistication of the capital budgeting are related to firm characteristics, variables proxying for real option features in investments and CFO characteristics (age and education). We also find support for significantly higher hurdle rates than motivated by economic theory. The premium is weakly positively related to managerial short‐term pressure and strongly negatively related to the sophistication level of the firm’s capital budgeting.

Planowanie i ocena projektów inwestycyjnych jednostek samorządu terytorialnego z wykorzystaniem metod budżetowania zadaniowego

Organizational and legal conditions influencing the investment policy of Polish self-government units can be judged as still uncertain. The need for strengthening the rple of long term planning in public finance remains one of the most vital and current problems, which is especially important in accotdance to the investment projects in the public sector. The research indicatet that effectiveness of the investment projects executed by the self-government units can be significantly improved by using elements of taks budgeting methodology. Task budgeting can be therefore considered as an instrument of management which helps to link strategic planning with the investment project management. Widening the scope of implementation of task budgeting should lead to the improvement of methods of theeconomic evaluation of investment projects as well as annual and ling-term programs. The important factor is that the terms: 'budgetary task' and 'investment project' are highly similar. That similarity can stimulate developing analitical methods which are based on financial and material indicators. Main conclusions of the conducted research are that the most important advantages of implementing the task budgeting methods derive from their role as strong analytic tool helping to manage any types of the unit's resources and concentrating on achieving strategic goals. The conducted analysis also proved that with the use of wide scope of analitical tools, the task budgeting methodology strongly stimulates expansion of implementing quantitative indicators in evaluation of the public investment projects.

Influence of the Post-Crisis Situation on Cost of Capital and Intrinsic Liquidity Value in Non-Profit Organizations

Cash maintained in nonprofit organizations is not a source of any interest and although the close to cash assesses together with credit lines available for enterprise are connected with resigning from realization of the part of incomes or costs, firms decide to maintain some liquidity reserves. Not only this, resulting from transactional needs, but also from precautional and speculative reasons. Investment in liquid reserves resulting from speculative demand for money may be assessed by usage of capital budgeting methods like: Net Present Value (NPV) or Internal Rate of Return (IRR) or as a call option.In the research paper, each of these aspects of liquidity was taken into consideration and presented from nonprofit perspective. Nonprofit liquidity value determination may often significantly contribute to the solution of working capital management problems in these organizations.

Capital budgeting practices used by selected listed South African firms

This article investigates the application of capital budgeting techniques and the incorporation of risk into the capital budgeting process among a sample of South African industrial firms listed on the JSE Securities Exchange for at least ten years. Previous international and local research on this topic indicated a preference for the internal rate of return (IRR) as a capital budgeting method over the net present value (NPV), and that risk incorporation was relatively rarely incorporated into the capital budgeting process. The results of this study indicate that the NPV is just as popular as, and sometimes more so than, the IRR. Furthermore, compared to previous studies, risk is incorporated into evaluating capital budgeting projects more often. Sensitivity analysis is the most popular method, but adjustments to the cash flows and discount rate are becoming more popular. During the last decade the use of non-financial criteria to accept or reject a project has also increased in South Africa.

Improving Memory Efficiency of Dynamic Memory Allocators for Real-Time Embedded Systems

Dynamic memory allocators for real-time embedded systems need to fulfill three fundamental requirements: bounded worst-case execution time, fast average execution time, and minimal fragmentation. Since embedded systems generally run continuously during their whole lifetime, fragmentation is one of the most important factors in designing the memory allocator. This paper focuses on minimizing fragmentation while other requirements are still satisfied. To minimize fragmentation, a part of a memory region is segregated by the proposed budgeting method that exploits the memory profile of the given application. The budgeting method can be applied for any existing memory allocators. Experimental results show that the memory efficiency of allocators can be improved by up to 18.85% by using the budgeting method. Its worst-case execution time is analyzed to be bounded.

Determinants of Capital Budgeting Methods and Hurdle Rates in Nordic Firms

Using survey data for 157 Nordic firms, we study the determinants for the choice of capital budgeting methods and the setting of hurdle rates (WACCs) in five Nordic countries. We combine survey data with a rich set of determinants, including ownership data, CFO characteristics, as well as financial data (firm characteristics). We find that the use of the NPV method as a primary method, and the sophistication of the capital budgeting, is related both to firm characteristics, variables proxying for real option features in investments, as well as to CFO characteristics (age and education). We also find support for a significant positive hurdle rate premium (i.e. a hurdle rate higher than motivated by economic theory). The premium is weakly related to managerial short-term pressure, and strongly negatively to the sophistication level of the firm's capital budgeting. This relationship goes in line with the predictions from real options and agency theory, since explanations from both categories combine the use of higher hurdle rates with a higher use of multiple methods and rules of thumb.

Real Healthcare Reform: Focus on Primary Care Access

Primary care coverage for the uninsured is the first necessary step to reform and can be more cost effective and tolerable than a major system reform. By providing foundational care to the uninsured, more care resources are targeted to those that most need the services, while providing benefits such as increased productivity and reduced inappropriate emergency department utilization. The authors aimed to design a primary care coverage system in the United States for the uninsured using established reimbursement, budgeting, and compliance methods. Providing four primary care visits for acute care, four associated ancillary and four fulfilled pharmaceutical–treatment prescriptions, and one preventive primary care visit per year for nearly 48,000,000 uninsured would cost $36 per month for every working American and legal alien resident. Theoretical and empirical literature was reviewed and the authors applied practical knowledge based on their experience in healthcare systems to develop the Access America Program.

Modeling Strategic Decisions Using Activity Diagrams to Consider the Contribution of Dynamic Planning in the Profitability of Projects Under Uncertainty

In this paper, a framework to consider the contribution of decision making and dynamic planning in the profitability of a project under uncertainty is proposed. Unified modeling language (UML) activity diagrams are constructed for different strategies of an ongoing engineering project whose final profitability is highly influenced by a set of uncertain variables, such as demand, costs and prices, or unexpected events. Some of these strategies can be, for instance, expanding, contracting, switching, abandoning, waiting, transferring, etc. A method to derive a simple mathematical model for carrying out a project from any UML activity diagram describing the strategy is also presented. This mathematical model can be easily implemented in a simulation environment, where the random nature of the different uncertain variables of the project, the relationships between them, and its final profitability can be considered. An example of the application of the proposed model is shown. This example also illustrates how to model the uncertainty in demand by means of a stochastic Bass process. We suggest that the proposed methodology be used by itself or as a complementary tool to the existing methods of capital budgeting by solving some of the deficiencies found in them. For instance: 1) net present value or return on investment is static in nature and cannot cope with uncertainty; 2) real options valuation may be an obscure technique and in many cases does not allow an operational strategy to be derived for guiding the project in real life; and 3) decision analysis occurs within the problem of the “flaw of averages,” by using expected values of different uncertain variables to calculate the profitability of a project instead of their complete probability distribution.

Valuing Multifactor Real Options Using an Implied Binomial Tree

This paper proposes an approach for solving a multifactor real options problem by approximating the underlying stochastic process with an implied binomial tree. The implied binomial tree is constructed to be consistent with simulated market information. By simulating European option prices as artificial market information, we apply the implied binomial tree method for real options valuation when the options are contingent on the value of market uncertainties that are not traded assets. Compared to the discrete approximations suggested in the current literature, this method offers a more flexible distribution assumption for project values and therefore provides an alternative approach to estimating the value of high-dimensional real options. For risk managers, it serves as a capital budgeting method for projects with managerial flexibility.

Quantitative validation of budgeting methods and suggestion of a new calculation method for the determination of maintenance costs

PurposeThe purpose of this paper is to offer a critical analysis of today's most common calculation methods for maintenance budgets in Europe. The methods are quantitatively validated using the real lifecycle data of 17 exemplary buildings. As a result, a new approach for the budgeting of maintenance measures is suggested which helps to define the real budgeting costs more accurately.Design/methodology/approachThe paper starts with a theoretical definition and critical discussion of the different budgeting methods. All methods are quantitatively validated using real data analysis. Analysed is the lifecycle data of 17 school or office buildings. The maintenance costs previously calculated using the existing calculation methods can thus be contrasted with the real maintenance costs and validated. The development of a new calculation method aims at the elimination of the shortcomings of the existing methods.FindingsThe paper finds that the calculation methods used today are only partially suitable for the prediction of the financial requirements of building maintenance. Real‐life building maintenance costs follow certain cycles and change considerably over time. Recently, calculation methods particularly underestimate the first big maintenance peak which is reached approximately 30 years after a building's construction. It also became clear that it is essential to include certain influencing factors into the calculation, as the analytical methods do. The findings lead to the development of a new calculation method called practical adaptive budgeting of maintenance measures. This method is the first to differentiate between annual and one‐off maintenance measures and includes empirically determined correcting factors to take into account specific building characteristics.Research limitations/implicationsThis paper's findings refer to the examination of 17 sample buildings. In order to be able to generalise the results, more research needs to be done using a higher number of sample buildings.Practical implicationsThis paper contributes to the improvement of the prospective calculation of maintenance budgets. The new calculation method is the first to enable maintenance experts to determine their maintenance budgets in a transparent and scientific way so that the required financial means to carry out necessary maintenance measures can be made available at the right time.Originality/valueBased on real maintenance data, it becomes possible for the first time to verify and validate theoretic calculation approaches from literature. The results are new findings that are useful in science as well as in real life.

Yüksekögretim Kurumlarinda Tesvik Esasli Bütçeleme ve Yönetisim Arasindaki Ilisk

This study focuses on the effects of an incentive-based budgeting system on faculty and administrators’ frames used during budgetary decision-making at a public higher education institution in the US. More specifically, this study explored the organizational frames (Bolman and Deal, 2003) used by faculty and administrators when they are involved in budgetary issues as well as how these frames have changed overtime. To explain this, a qualitative single institution case study was employed. The data used in the study came from two different sources: Individual interviews with faculty and administrators and institutional documents. The interviews with faculty and administrators took place over a fifteen-year period, corresponding with the implementation and ongoing use of responsibility center management as a budgeting method (RCM). These interviews were used to illustrate the organizational frames used by faculty and administrators at a public doctoral I institution in the Mid-West. The findings suggest that faculty and administrators use multiple frames in decision-making. When involved with budgetary issues, they both predominantly use structural frame, followed by political frame. In general, there has been a change toward a more rational decision-making process. This is made evident by the presence of structural frame being reported as particularly strong. On the other hand, the use of both human resource frame and of symbolic frame in the institution is described as eroding. Additionally, there exists a difference between the faculty and the administrators in the frames they most use.