Which methods give you a better result for making decision

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Reference no: EM133817513

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Article: Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting and Finance, 19(3).

Summary

The study analyzes how effectively small and medium-sized enterprises use capital budgeting. Capital budgeting is often mainly used by large enterprises that can gather and analyze complicated data about projects they intend to carry out. Small and medium-sized enterprises usually do not dedicate the same effort to analyzing potential projects by collecting and analyzing data. According to the study, SMEs gain the most from capital budgeting techniques because their capital is limited (Sarwary, 2019). Unlike large enterprises, which can quickly recover from unprofitable projects, SMEs may not fully recover from projects that result in substantial losses. Despite this, SMEs often don't evaluate their projects carefully by estimating and discounting cash flows they expect to receive. Instead, they rely mainly on accounting profit to assess a project's worth. The study identifies that most capital budgeting techniques are often complicated and may require estimates and data that an organization cannot easily access. The study also showed that in some cases, SMEs rely on qualitative information when analyzing projects and may not evaluate quantitative data on profits that can be made from a project. Lack of information on capital budgeting is generally identified as the most significant barrier that limits the extent to which firms can effectively use capital budgeting techniques.

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When used effectively, capital budgeting techniques provide essential information to firms that can aid decision-making. SMEs stand to benefit from using capital budgeting techniques as they often don't have the resources needed to diversify their operations to manage risk. Limited resources, however, mean that most SMEs usually fail to use capital budgeting techniques and instead overemphasize accounting profit to estimate likely gains from a project. A deliberate attempt to include numerous capital budgeting techniques in their operations can, therefore, be valuable to the operations of SMEs by making it easier to identify and undertake profitable projects. This can include hiring the right staff to incorporate these techniques into operations and using the right technologies to provide the information needed to evaluate projects. Using the right technologies, it can be easier to gather information from the market about a project that can be used to estimate and discount possible returns. Generally, the article shows capital budgeting is underutilized in SMEs despite its value in project evaluation.

References

Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting and Finance, 19(3).

Beena, thanks for your article and comments. Capital budgeting involves the time value of money. Capital budgeting decisions range from a few thousand dollars to billions. Decisions must be made about which project to fund and which to postpone or reject. Two tools used in making capital budgeting is net present value (NPV) and internal rate of return (IRR). Which of these two methods give you a better result for making a capital budgeting decision?

Reference no: EM133817513

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