JURNAL 3 - Merged

THE CAPITAL BUDGETING DECISIONS OF SMALL BUSINESSES
Morris G. Danielson*
St. Joseph’s University
Philadelphia, PA
Jonathan A. Scott
Temple University
Philadelphia, PA
Forthcoming:
Journal of Applied
Finance
Fall/Winter 2006
We acknowledge the helpful comments of Jacqueline Garner, William Petty, and participants at
the 2005 Financial Management Association and Eastern Finance Association Conferences.
*
Corresponding author: Erivan K. Haub School of Business, Saint Joseph’s University, Philadelphia, PA 19131;
Phone: (610) 660-1606; E-mail: [email protected]
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https://ssrn.com/abstract=3202231
Abstract
This paper uses survey data compiled by the National Federation of Independent Busi-
ness to analyze the capital budgeting practices of small firms. While large firms tend to rely on
the discounted cash flow analysis favored by finance texts, many small firms evaluate projects
using the payback period or the owner’s gut feel. The limited education background of some
business owners and small staff sizes partly explain why small firms use these relatively unso-
phisticated project evaluation tools. However, we also identify specific business reasons—
including liquidity concerns and cash flow estimation challenges—to explain why small firms do
not exclusively use discounted cash flow analysis when evaluating projects. These results sug-
gest that optimal investment evaluation procedures for large and small firms might differ. [G31]
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This paper analyzes the capital budgeting practices of small firms. The U.S. Small Busi-
ness Administration estimates that small businesses (which they define as firms with fewer than
500 employees) produce 50 percent of private GDP in the U.S., and employ 60 percent of the pri-
vate sector labor force. Many small businesses are service oriented, but according to the 1997
Economic Census over 50 percent are in agriculture, manufacturing, construction, transportation,
wholesale, and retail—all industries requiring substantial capital investment. Thus, capital in-
vestments in the small business sector are important to both the individual firms and the overall
economy.
Despite the importance of capital investment to small firms, most capital budgeting sur-
veys over the past 40 years have focused on the investment decisions of large firms (examples
include Moore and Reichardt, 1983, Scott and Petty, 1984, and Bierman, 1993). An exception is
Graham and Harvey (2001), who compare the capital budgeting practices of small and large
firms. Even their small firms are quite large, however, with a revenue threshold of $1 billion
used to separate firms by size. Indeed, less than 10 percent of their sample report revenues below
$25 million. Thus, Graham and Harvey’s results do not directly address the investment decisions
of very small firms.1
There are several reasons small and large firms might use different criteria to evaluate
projects. First, small business owners may balance wealth maximization (the goal of a firm in
capital budgeting theory) against other objectives—such as maintaining the independence of the
business (Ang, 1991, Keasey and Watson, 1993)—when making investment decisions. Second,
small firms lack the personnel resources of larger firms, and therefore may not have the time or
1
The Federal Reserve Board of Governor’s Survey of Small Business Finance serves as the data source in
many studies of small business finance. The firms in the Board of Governor’s Survey tend to be much
smaller than the firms in the Graham and Harvey (2001) sample; in the 1993 Board of Governor’s survey,
83 percent of the firms report revenues under $1 million. The firms in the Graham and Harvey sample,
therefore, are much larger than firms typically included in studies of small business finance.
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the expertise to analyze projects in the same depth as larger firms (Ang, 1991). Finally, some
small firms face capital constraints, making project liquidity a prime concern (Petersen and Ra-
jan, 1994, and Danielson and Scott, 2004). Because of these small firm characteristics, survey
results on the capital budgeting decisions of large firms are not likely to describe the procedures
used by small firms.
To document the capital budgeting practices of small businesses, defined here as firms
with fewer than 250 employees, we use survey data collected for the National Federation of Inde-
pendent Business (NFIB) Research Foundation by the Gallup Organization. The results include
information about the types of investments the firm makes (e.g., replacement versus expansion),
the primary tools used to evaluate projects (e.g., discounted cash flow analysis, payback period),
the firm’s use of other planning tools (e.g., cash flow projections, capital budgets, and tax plan-
ning activities), and the owner’s willingness to finance projects with debt. The survey also in-
cludes demographic variables that allow us to examine the relations between capital budgeting
practice and firm characteristics such as size, sales growth, industry, owner age, owner education
level, and business age.
Not surprisingly, we find small and large firms evaluate projects differently. While large
firms tend to rely on the discounted cash flow calculations favored by capital budgeting theory
(Graham and Harvey, 2001), small firms most often cite “gut feel” and the payback period as
their primary project evaluation tool. Less than 15 percent of the firms claim discounted cash
flow analysis as their primary criterion, and over 30 percent of the firms do not estimate cash
flows at all when they make investment decisions. The very smallest of the surveyed firms (firms
with 3 employees or fewer) are significantly less likely to make cash flow projections, perhaps
because of time constraints.
Certainly a lack of sophistication contributes to these results, as over 50 percent of the
small-business owners surveyed do not have a college degree. Yet, there are also specific busi-
ness reasons why discounted cash flow analysis may not be the best project evaluation tool for
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every small firm. For example, 45 percent of the sample would delay a promising investment
until it could be financed with internally generated funds, suggesting the firms face real (or self-
imposed) capital constraints.2
We also find that the most important class of investments is “replacement” for almost 50
percent of the firms. Discounted cash flow calculations may not be required to justify replace-
ment investments if the owner is committed to maintaining the firm as a going concern, and if the
firm has limited options about how and when to replace equipment.
Finally, investments in new product lines are the most important class of investments for
almost one-quarter of the sample firms. Because the ultimate success of this type of investment is
often uncertain, it can be difficult to obtain reliable future cash flow estimates, reducing the value
of discounted cash flow analysis. Thus, our results suggest that optimal methods of capital budg-
eting analysis can differ between large and small firms.
I. Capital Budgeting Theory and Small Firms
Brealey and Myers (2003) present a simple rule managers can use to make capital budgeting
decisions: Invest in all positive net present value projects, and reject those with a negative net present
value. By following this rule, capital budgeting theory says firms will make the set of investment de-
cisions that will maximize shareholder wealth. And, because net present value is a complete measure
of a project’s contribution to shareholder wealth, there is no need for the firm to consider alternative
capital budgeting tools, such as payback period or accounting rate of return.
Yet, small firms often operate in environments that do not satisfy the assumptions underlying
the basic capital budgeting model. And, small firms may not be able to make reliable estimates of
future cash flows, as required in discounted cash flow analysis. We discuss these potential problems
2
Survey participants were asked: “Suppose you had the opportunity to make an investment in your busi-
ness that would allow earnings to rise 25 percent within the next two years. The project had minimal risk,
but you did NOT have the cash right then to make the investment. Would you most likely . . . ?” The
choices included wait until you accumulate enough cash, borrow the money and make the investment, seek
an outside investor, and other. Forty-five percent of the respondents selected wait until you accumulate
enough cash.
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in detail, and explain why discounted cash flow analysis is not necessarily the one best capital budget-
ing decision tool for every small firm.
A. Capital Budgeting Assumptions and the Small Firm
Capital budgeting theory typically assumes that the primary goal of a firm’s shareholders
is to maximize firm value. In addition, the firm is assumed to have access to perfect financial
markets, allowing it to finance all value-enhancing projects. When these assumptions are met,
firms can separate investment and financing decisions, and should invest in all positive net pre-
sent value projects (Brealey and Myers, 2003).
There are at least three reasons to question the applicability of this theory to small firms.
First, shareholder wealth maximization may not be the objective of every small firm. As Keasey
and Watson (1993, p. 228) point out, an entrepreneur may establish a firm as an alternative to
unemployment, as a way to avoid employment boredom (i.e., as a life-style choice), or as a vehi-
cle to develop, manufacture, and market inventions. In each case, the primary goal of the entre-
preneur may be to maintain the viability of the firm, rather than to maximize its value.3
Second, many small firms have limited management resources, and lack expertise in fi-
nance and accounting (Ang, 1991). Because of these deficiencies, they may not evaluate projects
using discounted cash flows. Providing some support for this conjecture, Graham and Harvey
(2001) find that small-firm managers are more likely to use less sophisticated methods of analy-
sis, such as the payback period.4
The final impediment is capital market imperfections, which constrain the financing op-
tions for small firms. Some cannot obtain bank loans, because of their information-opaqueness
3
In a survey of Swiss firms, Jorg, Loderer, and Roth (2004) find that maintaining the independence of the
firm was cited more frequently than shareholder value maximization as a goal of managers. They also find
that firms pursuing goals other than shareholder value maximization were less likely to rely on discounted
cash flow analysis for investment decisions.
4
The small firms in the Graham and Harvey (2001) have up to $1 billion in annual revenues. Thus, it is
likely that many of these firms have more complete management teams than the small firms envisioned by
Ang (1991). In contrast, we evaluate the capital budgeting policies of very small firms—our sample in-
cludes only firms with less than 250 employees, and over 80 percent of the firms have less than 10 employ-
ees—where the problem of incomplete management teams is likely to be most severe.
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and lack of strong banking relationships (e.g., Petersen and Rajan, 1994 and 1995, and Cole,
1998). Ang (1991) notes that access to public capital markets can be expensive for certain small
firms, and impossible for others. These capital constraints can make it essential for small firms to
maintain sufficient cash balances, in order to respond to potentially profitable investments as they
become available (Almeida, Campello, and Weisbach, 2004). Thus, capital constraints provide
small privately held firms with a legitimate economic reason to be concerned about how quickly a
project will generate cash flows (i.e., the payback period).
B. Cash Flow Estimation Issues
In his critique of capital budgeting theory, Booth (1996) describes estimation issues man-
agers must confront when implementing discounted cash flow analysis. He concludes that dis-
counted cash flow analysis is less valuable, the more uncertain the level of future cash flows.
According to this view, discounted cash flow analysis can be applied most directly to projects
with cash flow profiles similar to the firm’s current operations (such as projects extending those
operations). Discounted cash flow analysis will be less valuable to evaluate ventures that are not
directly related to current activities.
Although Booth developed these ideas for large multinational corporations, they can also
be applied to small firms. If a small firm is considering investment in a new product line, future
cash flows cannot be estimated directly from the past performance of the firm’s current opera-
tions. In addition, because of the firm’s scale, market research studies to quantify future product
demand (and cash flows) might not be cost effective. For these reasons, small firms may not rely
exclusively on discounted cash flow analysis when evaluating investments in new product lines.
There are also reasons why a small firm may not use discounted cash flow analysis to
evaluate replacement decisions. In many cases, replacing equipment is not a discretionary in-
vestment for a small firm; the firm must replace the equipment to stay in business. In some re-
placement decisions, a small firm may have limited replacement options, and differences in the
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future maintenance costs of the various options can be difficult to forecast.5
Because small firms do not satisfy the assumptions underlying capital budgeting theory,
and because of these cash flow estimation challenges, it would be natural for small firms to
evaluate projects using different techniques than large firms. But, evidence about these differ-
ences is largely anecdotal. We use survey data to document the capital budgeting practices of
small firms, and to provide evidence about whether small-firm project evaluation methods are
related to the type of investment under consideration.
II. Description of Data
The use of survey data to document capital budgeting practices has a long history in the
finance literature.6 Yet, survey results should be interpreted with caution because surveys meas-
ure manager beliefs, not necessarily their actions; survey participants may not be representative of
the defined population of firms; and survey questions may be misunderstood by some participants
(Graham and Harvey, 2001, p. 189). Nonetheless, surveys provide information that cannot be
readily gleaned from financial statements. In particular, surveys can shed light on how firms
make investment and financing decisions, and why they use these approaches.
The data for this study were collected for the NFIB Research Foundation by the Gallup
Organization. The interviews for the survey were conducted in April and May 2003 from a sam-
ple of small firms, defined as a business employing at least one individual in addition to the
owner, but no more than 249. The sampling frame for the survey was drawn at the NFIB’s direc-
tion from the files of the Dun & Bradstreet Corporation. Because the distribution of small busi-
5
Booth (1996) also concludes that discounted cash flow analysis might not be used for replacement deci-
sions, but for a different reason. He argues that the payback period combined with judgment can often lead
a firm to the correct decision for replacement projects, making discounted cash flow analysis unnecessary.
6
Scott and Petty (1984) summarize the results of 21 early studies of large firm capital budgeting practices.
The selection criteria in these studies include membership in the Fortune 500/1000, a minimum level of
capital expenditures, size, or stock appreciation in excess of certain benchmarks. In more recent studies,
Moore and Reichardt (1983) surveyed 298 Fortune 500 firms, Bierman (1993) looked at 74 Fortune 100
firms, and Graham and Harvey (2001) investigated the behavior of 392 firms chosen from the membership
of the Financial Executives Institute and the Fortune 500.
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nesses is highly skewed when ranked by number of employees, interview quotas were used to add
more larger firms to the sample. Once the data were compiled, the responses were weighted to
reflect population proportions based on U.S. Census data, yielding a sample of 792 observations.
Exhibit 1 summarizes the demographic characteristics of the sample—industry, sales
growth, business age, employment, owner education, and owner age. For each attribute, we
group responses into three to five categories.
Insert Exhibit 1 here
Exhibit 1 shows 72 percent of the sample firms are in construction, manufacturing, retail,
or wholesale, all industries requiring substantial capital investments. Service industries, where
capital expenditures may have less importance, account for 20 percent of the sample.
The sample is distributed evenly across four real sales growth categories. The high-
growth category is defined as a cumulative (not annualized) increase of 20 percent or more over
the past two years, and includes 24 percent of the sample firms. At the other extreme, 24 percent
of the firms report two-year sales declines of 10 percent or more. This distribution implies that
approximately 75 percent of the sample firms have experienced an average annualized growth
rate of 10 percent or less over the last two years. Thus, many of the capital budgeting decisions
of small firms may be focused more on maintaining current levels of service and quality, rather
than on expansion.
Similarly, the sample is distributed fairly evenly across four business-age categories,
ranging from six years in business or less (23 percent of the sample), to 21 years in business or
more (27 percent of the sample). The number of years in business could influence both the type
of investments a firm will make and the firm’s planning process. For example, firms in business
longer may have more equipment in need of replacement. A business with a limited operating
history may not be able to obtain a bank loan unless it can demonstrate that it has appropriate
planning processes in place.
The median (mean) number of total employees is 4 (9). Sixteen percent of the firms have
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only one employee, and only 18 percent have 10 or more. Thus, it is likely that many sample
firms do not have complete management teams, and may not have adequate staff to fully analyze
capital budgeting alternatives.
The data in Exhibit 1 also suggest that the educational background of owners could influ-
ence how the firm makes capital budgeting decisions. Over 50 percent of the business owners do
not have a four-year college degree, and only 13 percent have an advanced or professional de-
gree. Therefore, many of the small-business owners may have an incomplete (or incorrect) un-
derstanding of how capital budgeting alternatives should be evaluated.
Finally, 63 percent of the business owners are at least 45 years old, and 32 percent are 55
or older. There is some evidence that older managers evaluate capital investments using less so-
phisticated methods (see Graham and Harvey, 2001).
III. Survey Results
We use the NFIB survey to address three questions concerning the capital budgeting ac-
tivities of small firms. We first consider whether the investment and financing activities of small
firms conform to the assumptions underlying capital budgeting theory. Then, we look at the
overall planning activities of small firms (e.g., use of business plans, consideration of tax implica-
tions) and identify firm characteristics that tend to be present when more sophisticated practices
are in place. Finally, we provide evidence about the specific project evaluation techniques small
firms use (e.g., payback period, discounted cash flow methods). We identify significant differ-
ences between the average responses in various subsets of firms and the overall sample averages
using a binomial Z-score. We use multinomial logit to evaluate how the choice of investment
evaluation tools is related to a set of firm characteristics.
A. Investment Activity
Exhibit 2 describes the investment activities of sample firms. It identifies the firms’ most
important type of investment over the previous 12 months, and reports the percentage of firms
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that will delay a potentially profitable investment until the firm has enough internally generated
cash to fund the project.
The most important type of investment is replacement for 46 percent of the sample firms.
Firms in service industries were more likely than the average sample firm to select this response,
and those in construction and manufacturing were less likely. Firms with the highest growth rates
and those in business less than six years were less likely than the average sample firm to report
replacement activity as the primary investment type. Finally, the importance of replacement ac-
tivity increases with the age of the business owner; it is significantly less than the overall sample
mean when the business owner is younger than 44.7
Projects to extend existing product lines are shown as the primary investment activity for
21 percent of the sample firms. Construction and manufacturing firms select this response at a
higher rate than the overall sample average. The remaining subsample averages are not signifi-
cantly different from the overall sample averages (at the 5 percent significance level).
Investments in new product lines are reported as the most frequent investment for 23 per-
cent of the sample firms. Firms in the service industry were less likely than the average sample
firm to select this response. Firms with the highest growth rates were more likely (than the over-
all sample average) to be expanding into new product lines, while those with the lowest growth
rate were less likely. The oldest firms were also less likely than the average firm to be consider-
ing expansion into new product lines.
Exhibit 2 also suggests that many small firms face real (or self-imposed) capital con-
straints. Forty-five percent of the sample firms report they would delay a promising investment
7
The significance of the subsample entries depends on the difference between the subsample mean and the
overall sample mean in a given column, and on the number of observations in the subsample (most of these
numbers appear in Exhibit 1). Thus, it is possible for two subsamples to have similar response percentages,
one significant and the other not. For example, 54 percent of the service firms identify replacement as the
primary investment type, while 55 percent of the firms in the “other” industry category select this invest-
ment type. This response percentage is significantly different from the overall sample average for service
firms, but not for the “other” firms. As shown in Exhibit 1, there are twice as many service industry firms.
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until it could be financed with internally generated funds (wait for cash). Firms most likely to
wait for cash include the youngest firms, the smallest firms, and those whose owner does not
have a college degree. As these firms are likely to face capital market constraints, this result sup-
ports the prediction in Almeida, Campello, and Weisbach (2004) that capital constraints will
make a firm more likely to save cash. Firms with older owners are also slightly more likely to
wait for cash than firms with younger owners.
These results suggest three reasons small firms might not follow the prescriptions of capi-
tal budgeting theory when evaluating projects. First, it is noteworthy that replacement activity is
the most important type of investment for almost half of the sample firms. If replacing old
equipment is necessary for the firm to remain in business, the owner’s capital budgeting decision
is essentially a choice between replacing the machine and staying in business, or closing the busi-
ness and finding employment elsewhere. In this case, maintaining the viability of the firm as a
going concern, rather than maximizing its value, might be the owner’s primary objective.
Second, the results suggest that many small firms place internal limits on the amount they
will borrow. Thus, many small firms cannot (or choose not to) separate investment and financing
decisions, contrary to capital budgeting theory.
Finally, the results suggest that the personal financial planning considerations of business
owners may affect the investment and financing decisions of small firms. In particular, older
owners are more conservative in their strategies than younger owners (older owners focus more
on replacement activity and are more likely to report that they will wait for cash). These results
conflict with an assumption of capital budgeting theory: that the transferability of ownership in-
terests (at low cost) allows managers to separate the planning horizon of a business from the
planning horizon of its owners.
B. Planning Activity
Exhibit 3 analyzes three dimensions of each firm’s planning environment: how frequently
firms estimate cash flows in making capital budgeting decisions; whether they have written busi-
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ness plans; and whether they consider tax implications in making capital budgeting decisions.
Exhibit 3 reports that only 31 percent of the sample firms have a written business plan.
Over 30 percent of the sample firms do not estimate future cash flows when making investment
decisions, and 26 percent of the firms do not consider the tax implications of investment deci-
sions. Thus, many small firms do not have a formal planning system that guides capital budget-
ing decisions.
Firms with the highest growth rates (over 20 percent growth) are more likely to use each
of these planning tools, particularly written business plans and consideration of tax effects. Simi-
larly, firms that extend existing product lines or invest in new lines of business engage in more
planning activities than the average sample firm. As firms expand, they use up more of their bor-
rowing capacity, reducing their future financial flexibility (assuming that they face capital con-
straints). For these firms, it may be essential to plan ahead, so the firm is not forced to pass up
promising opportunities in the future.
Newer firms (less than 6 years old) and younger owners (less than 45 years old) are more
likely than other firms to use written business plans. This is an expected result, given that banks
require evidence of planning before extension of credit to firms with short operating histories.
The smallest firms (three or fewer employees) are less likely to make cash flow projec-
tions, while firms with ten or more employees are more likely to make these estimates. This find-
ing supports conjectures made by Ang (1991) and Keasey and Watson (1993) that personnel con-
straints (incomplete management teams) may hamper small firms in planning.
The planning activities of small firms are also strongly related to the educational back-
ground of the business owner. If the business owner does not have a college degree, the firm is
less likely than the average firm to make cash flow projections or to use written business plans. If
the business owner has an advanced/professional degree, the firm is more likely to engage in such
activities.
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C. Project Evaluation Methods
Exhibit 4 summarizes responses about the primary tool firms use to assess a project’s fi-
nancial viability: payback period, accounting rate of return, discounted cash flow analysis, “gut
feel,” or combination. The most common response is the least sophisticated, gut feel—selected
by 26 percent of the sample firms.8
The use of gut feel is strongly related to the business owner’s educational background.
Owners without a college degree resort to it most frequently, and owners with advanced degrees
least. The use of gut feel is also inversely related to a firm’s use of planning tools. Firms with
written business plans and firms that make cash flow projections are significantly less likely to
rely on gut feel.
While the use of gut feel is concentrated in the least sophisticated of small firms, it is also
widely used by firms that make primarily replacement investments. A firm may have limited op-
tions when it replaces equipment, and estimating future cash flows (i.e., incremental maintenance
costs or efficiency gains) for each option might be difficult. For example, if a firm must replace a
delivery truck, it may be difficult for the firm to estimate differences in the future annual operat-
ing costs of two replacement vehicles under consideration. Moreover, if an investment is neces-
sary for the firm’s survival (and the owner is committed to maintaining the business as a going
concern), the maximization of firm value may not be the business owner’s primary objective.
Instead, the owner may simply look for the alternative promising the required level of perform-
ance at the most reasonable cost. Thus, it is not surprising to find that small business owners use
relatively unsophisticated methods of analysis to evaluate replacement options.
Gut feel is also used extensively by firms in the service industry. Although some service
firms make substantial capital expenditures, the investments of many service firms might be lim-
8
Vos and Vos (2000) report “intuition” as the most frequently used project evaluation technique in a sur-
vey of 238 small New Zealand businesses.
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ited to business vehicles or office equipment. Because a firm’s primary considerations when
evaluating this type of purchase decision may be cost, reliability, and product features, structuring
a discounted cash flow analysis of these investments can be difficult.
Payback period is the second most common response, selected by 19 percent of the sam-
ple. The payback period is used slightly more often by firms that will wait for cash, as expected.
Firms using the payback period are significantly more likely than other firms to estimate future
cash flows (because cash flow estimates are required for this calculation). Finally, use of the
payback period appears to increase with the formal education of the business owner.
These results suggest that the payback period conveys important economic information in
at least some circumstances. For example, the payback period can be a rational project evaluation
tool for small firms facing capital constraints (i.e., firms that do not operate in the perfect finan-
cial markets envisioned by capital budgeting theory). In this case, projects that return cash
quickly could benefit a firm by easing future cash flow constraints.
The accounting rate of return is the next most frequent choice, identified by 14 percent of
the firms as their primary evaluation method. The use of accounting rate of return increases with
firms’ growth rates; it is significantly higher than the sample mean for firms entering new lines of
business. Each of these characteristics can indicate high borrowing needs. The accounting rate
of return is thus especially important if a firm must provide banks with periodic financial state-
ments, or is required to comply with loan covenants based on financial statement ratios.
The most theoretically correct method—discounted cash flow analysis—is the primary
investment evaluation method of only 12 percent of the firms. Not surprisingly, owners with ad-
vanced/professional degrees are most likely to use this method; 17 percent of these firms identify
it as their primary evaluation tool. Firms with written business plans and those that consider the
tax implications of investments are also significantly more likely to use discounted cash flow
techniques. Thus, firms using this project evaluation method are among the most sophisticated of
the small firms.
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Firms extending existing product lines are also significantly more likely to use discounted
cash flow analysis. This result is evidence that discounted cash flow analysis is most useful when
evaluating projects with cash flow profiles similar to current operations (such as projects extend-
ing existing product lines), because it is easier to obtain reliable cash flow estimates in this case.
Another noteworthy finding is that 18 percent of the firms in business less than six years
use this method, the most of any age group. Although younger firms are less likely to have com-
plete management teams in place, it is also possible that banks may encourage newer firms to
demonstrate adequate planning (and project evaluation) procedures before qualifying for credit.
Of the specific evaluation techniques firms could choose from, combination of methods
was selected least often, by 11 percent of firms. Use of this approach does not appear to be
strongly related to any of the firm characteristics listed in Exhibit 4.
The results in Exhibit 4 are very different from results in Graham and Harvey (2001).
Approximately 75 percent of their firms evaluate projects using estimates of project net present
value or internal rate of return. The vast majority of their firms also appear to consider multiple
measures of project value in making investment decisions. However, even the smaller firms in
the Graham and Harvey study are much larger than the firms in our sample, and are thus more
likely to have complete management teams. It is therefore not surprising that their firms use
more sophisticated methods of project analysis.
D. Multivariate Analysis
To provide a multivariate perspective on how small firms make investment decisions, we
use multinomial logit to jointly identify factors influencing the choice of a project evaluation tool.
This technique is appropriate when an unordered response, such as a set of project evaluation
tools, has more than two outcomes.
Exhibit 5 reports the results of this exercise; gut feel is the omitted category. Thus, the
coefficients listed in Exhibit 5 should be interpreted as the increase (a positive coefficient) or the
reduction (a negative coefficient) in the log odds between the evaluation tool specified and gut
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feel.
The results show that firms using any of the formal investment evaluation tools are more
likely to make cash flow projections than firms using gut feel. Firms using the accounting rate of
return, discounted cash flow, or a combination of methods are more likely to consider tax impli-
cations when they evaluate projects. These results corroborate the results in Exhibit 4—firms
using gut feel to evaluate projects have much less structured planning environments than other
firms.
Exhibit 5 also identifies factors that differentiate between firms attaching primary impor-
tance to the various investment evaluation tools. The results suggest that capital constraints and
the type of investment (e.g., replacement, expand product line, new product line) can influence
how firms evaluate projects.
The wait for cash coefficient is positive and significant for both payback period and dis-
counted cash flow analysis. These results suggest that firms committed to funding projects inter-
nally are not necessarily irrational or unsophisticated. Instead, the decision to wait for cash might
be an acknowledgment that the firm does not operate in a perfect financial market, and faces capi-
tal constraints. Because the firm knows it may not be able to fund all valuable projects, it will
evaluate projects using the payback period (to help it allocate investment funds over a multiyear
horizon) or discounted cash flow analysis (to help it identify the best projects).
The accounting rate of return is frequently the choice of firms pursuing either growth
strategy: expand product line or new product line. The coefficients for both of these variables are
positive and significant for accounting rate of return. As a firm grows, it may need to raise new
capital, either by obtaining a bank loan or by attracting new equity investors. In either case, the
firm’s historical and projected financial statements will be used to communicate information
about the firm to investors. The accounting rate of return can be valuable to firms pursuing
growth strategies because it provides information about how a project will affect a firm’s finan-
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cial statements (and its ability to meet accounting-based loan covenants).
The importance of discounted cash flow analysis depends on the type of growth the firm
is pursuing. The coefficient for expanding an existing product line is positive and significant for
discounted cash flows, but the coefficient for new product line is not. Firms will use discounted
cash flows to evaluate projects that extend existing product lines because future cash flow esti-
mates can be based on past performance in this case. But, if it is contemplating a new product
line, where obtaining future cash flow estimates can be difficult, the firm is less likely to use a
discounted cash flow method of analysis.
IV. Summary
Firms with fewer than 250 employees analyze potential investments using much
less sophisticated methods than those recommended by capital budgeting theory. In par-
ticular, survey results show these businesses use discounted cash flow analysis less fre-
quently than gut feel, payback period, and accounting rate of return.
Many small-business owners have limited formal education, and their firms may
have incomplete management teams. Therefore, a lack of financial sophistication is an
important reason why the capital budgeting practices of small firms differ so dramatically
from the recommendations of theory. Small staff sizes also constrain the amount of capi-
tal budgeting analyses the firms can perform. Beyond this, there are also substantive rea-
sons a small firm might choose to use methods other than discounted cash flow analysis
to evaluate projects.
The primary reason is that many small businesses do not operate in the perfect
capital markets that capital budgeting theory assumes. Most of the firms in our sample
are very small (with fewer than 10 employees); they have short operating histories (al-
most half have been in business under 10 years), and their owners are not college edu-
16
Electroniccopy
available at:
cated. These characteristics may limit their bank credit, posing credit constraints. If so,
these firms may be required to finance some future investments using internally gener-
ated funds, and it would not be surprising for the owners to consider measures of project
liquidity (such as the payback period) when making investment decisions.
Second, many of the investments that small firms make cannot easily be evaluated
using the discounted cash flow techniques recommended by capital budgeting theory.
Many investments by small firms are not discretionary (a firm either makes a specific in-
vestment or it goes out of business), and future cash flows can be difficult to quantify.
For example, if a firm is introducing a new product line, estimates of future cash flows
can be imprecise (and market research studies required to obtain better cash flow esti-
mates may not be cost effective). When future cash flows cannot be easily estimated,
discounted cash flow analysis may not provide a reliable estimate of a project’s contribu-
tion to firm value, and it is not surprising that a firm might resort to gut feel to analyze
the investment.
For these reasons, small firms face capital budgeting challenges that differ from
those faced by larger firms. Thus, it is possible that optimal capital budgeting methods
for large and small firms may differ. However, a fully integrated capital budgeting the-
ory—identifying the conditions under which discounted cash flow analysis is appropri-
ate—has yet to be developed. The question of how to better tailor the prescriptions of
capital budgeting theory for small firms remains unanswered.
17
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References
Almeida, H., M. Campello, and M. Weisbach, 2004, “The Cash Flow Sensitivity of Cash,” Jour-
nal of Finance 59 (No. 4, August), 1777–1804.
Ang, J., 1991, “Small Business Uniqueness and the Theory of Financial Management,” The
Journal of Small Business Finance 1 (No. 1), 1–13.
Bierman, H., 1993, “Capital Budgeting in 1992: A Survey, ” Financial Management 22 (No. 3,
Autumn), 24.
Booth, L., 1996, “Making Capital Budgeting Decisions in Multinational Corporations,” Manage-
rial Finance 22 (No. 1), 3–18.
Brealey R. and S. Myers, 2003, Principles of Corporate Finance, New York, McGraw-
Hill/Irwin.
Cole, R., 1998. “The Importance of Relationships to the Availability of Credit,” Journal of Bank-
ing and Finance 22 (Nos. 6–8, August) , 959–977.
Danielson, M. and J. Scott, 2004. “Bank Loan Availability and Trade Credit Demand,” Financial
Review 39 (No. 4, November), 579–600.
Graham J. and C. Harvey, 2001. “The Theory and Practice of Corporate Finance: Evidence from
the Field,” Journal of Financial Economics 60 (Nos. 2–3, May), 187–243.
Jorg, P., Loderer, C., Roth, L., 2004, “Shareholder Value Maximization: What Managers Say and
What They Do,” DBW Die Betriebswirtschaft 64 (No. 3), 357–378.
Keasey K. and R. Watson, 1993, Small Firm Management: Ownership, Finance and Perform-
ance, Oxford, Blackwell.
Moore J. and A. Reichert, 1983. “An Analysis of the Financial Management Techniques Cur-
rently Employed by Large U.S. Corporations,” Journal of Business Finance and Accounting
10 (No. 4, Winter), 623–645.
Petersen, M. and R. Rajan, 1994. “The Benefits of Firm-Creditor Relationships: Evidence from
Small Business Data,” Journal of Finance 49 (No. 1, March), 3–37.
Petersen, M. and R. Rajan, 1995. “The Effect of Credit Market Competition on Lending Relation-
ships,” Quarterly Journal of Economics 60 (No. 2, May), 407–444.
Scott, D. Jr., and W. Petty II, 1984. “Capital Budgeting Practices in Large American Firms: A
Retrospective Analysis and Synthesis,” Financial Review 19 (No. 1, March), 111–123.
Vos, A. and E. Vos, 2000. “Investment Decision Criteria in Small New Zealand Businesses,”
Small Enterprise Research 8 (No. 1), 44–55.
18
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available at:
Exhibit 1
Sample Description
The weighted distributions of the responses to the National Federation
of Independent Business' Reinvesting in the Business Survey conducted
by the Gallup Organization.
No. of Obs % of Total
Industry
Service 155 20
Construction/manufacturing 194 24
Retail/wholesale 378 48
Other 65 8
Real 2-year sales growth
20 percent or higher 194 24
10-19 percent 179 23
+/- 10 percent 200 25
-10 percent or lower 187 24
No answer 32 4
Business age
< 6 years 183 23
6-10 years 173 22
11-20 years 213 27
21+ years 216 27
No answer 7 1
Employment
1 127 16
2-3 233 29
4-10 287 36
10+ 145 18
Owner education level
Less than college degree 415 52
College degree 260 33
Advanced/prof. degree 105 13
No answer 12 2
Owner age
< 35 years 81 10
35-44 years 194 24
45-54 years 244 31
55+ years 255 32
No answer 18 2
Total 792 100
Electroniccopy
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Exhibit 2
Investment Activity
Percentage distributions are presented for the question, "Measured in dollars, what was
the purpose of the largest share of the investments made in your business in the last 12
months?" The last column presents the percentage of all firms that would delay
investments until they could be financed internally with cash. ++ (– –) indicates that the
cell percentage is significantly greater than (less than) the column total, at a 5%
significance level, and + (–) indicates that the cell percentage is significantly greater than
(less than) the column total, at a 10% significance level, using a binomial Z-score.
Type of Investment Recently Made
Expand New
Existing Product Wait for
Replace Product Line Other Cash
Industry
Service 54 ++ 21 16
––
3 42
Construction/manufacturing 30 – – 31 ++ 28+ 1– – 42
Retail/wholesale 49 18 24 5 45
– ++
Other 55 12 22 9 56
20 percent or higher 37 – – 24 31
++
5 45
10-19 percent 52 21 21 3 50
+/- 10 percent 50 22 23 3 35
––
-10 percent or lower 47 20 16 5 47
Business age
––
< 6 years 38 23 26 4 52
+
6-10 years 40 27 27 2 44
–
11-20 years 51 16 24 3 38
––
21+ years 51 20 17 6 45
Employment
1 47 20 20 5 58
2-3 47 20 21 4 43
+ –
4-10 42 25 26 2 43
10+ 48 19 23 5 37
Less than college degree 44 21 23 4 49
College degree 45 20 23 4 38
Advanced/prof. degree 53 22 23 1 44
Owner age
–– ++
<35 years 33 23 29 9 42
––
35-44 years 38 23 28 4 38
––
45-54 years 49 21 23 1 49
55+ years 51 20 19 4 47
Total 46 21 23 4 45
Electroniccopy
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Exhibit 3
Investment Planning Tools
Responses are presented to three questions about planning tools used in the evaluation of
capital investments. "Make CF Projections" presents the percentage of respondents who
said they typically make cash flow projections prior to making a major investment in their
business. "Written Business Plan" presents the percentage of respondents who said they
had a written business plan projecting the major investments planned over the next few
years. "Taxes Calculated/Considered" presents the percentage of respondents who reported
they typically calculated or considered the tax implications of a major investment in their
business. ++ (– –) indicates that the cell percentage is significantly greater than (less than)
the column total, at a 5% significance level, and + (–) indicates that the cell percentage is
significantly greater than (less than) the column total, at a 10% significance level, using a
binomial Z-score.
Planning Tools
Taxes
Make CF Written Calculated/
Projections Business Plan Considered
Industry
Service 71 34 72
Construction/manufacturing 68 32 71
Retail/wholesale 70 30 75
Other 67 27 83+
20 percent or higher 74 38++ 79+
10-19 percent 66 29 75
+/- 10 percent 68 28 74
-10 percent or lower 70 29 68
Business age
< 6 years 80++ 46
++
79
+
6-10 years 71 28 72
11-20 years 71 28 72
21+ years 58– – 23
––
74
Employment
1 61– – 35 75
2-3 64– 24– – 77
4-10 72 33 72
10+ 81++ 36 74
Less than college degree 65– 27– 73
College degree 73 35 75
Advanced/prof. degree 81++ 38 83++
Owner age
<35 years 80 40+ 73
35-44 years 73 37+ 78
45-54 years 69 34 73
55+ years 66 21– – 74
Wait for cash 69 32 77
Investment type
Replacement 67 23– – 72
Expand existing product 71 37+ 76
++ +
New product line 74 42 80
Other 81 49+ 83
Total 69 31 74
Electroniccopy
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Exhibit 4
Investment Decision Tools
Responses are presented to the question about the investment tools used to assess the
financial viability of a major investment in the business. Each of the five responses are
reported under Investment Tools. ++ (– –) indicates that the cell percentage is
significantly greater than (less than) the column total, at a 5% significance level, and +
(–) indicates that the cell percentage is significantly greater than (less than) the column
total, at a 10% significance level, using a binomial Z-score.
Investment Tools
Gut Combin-
Payback ARR DCF Feel ation
Industry
Service 18 11 13 33++ 11
Construction/manufacturing 19 14 11 22 15+
Retail/wholesale 19 16 13 25 8–
Other 23 6– 9 29 14
20 percent or higher 15 17 14 26 9
10-19 percent 26++ 14 11 27 9
+/- 10 percent 21 12 11 24 12
-10 percent or lower 18 11 14 31 9
Business age
< 6 years 21 14 18++ 24 8
6-10 years 19 10 12 29 9
11-20 years 17 19++ 13 23 11
21+ years 20 11 7– – 28 14
Employment
1 22 14 13 25 11
2-3 20 15 11 25 12
4-10 16 12 13 28 10
10+ 21 16 12 25 9
Less than college degree 18 12 12 29 10
College degree 20 18+ 10 23 12
Advanced/prof. degree 24 11 17++ 17– – 13
Owner age
<35 years 26 10 14 19 14
35-44 years 14– – 19++ 18++ 21 11
45-54 years 24++ 15 7– – 31+ 10
55+ years 16 11 13 27 11
Wait for cash 21 12 15 24 8
Investment type
Replacement 20 11 12 31++ 13
Expand existing product 20 14 17+ 20– 8
New product line 19 20++ 9 23 13
Other 21 17 14 14 3
Planning tools
Cash flow projection made 23++ 15 14 22– 13
Written business plan 19 18+ 16+ 20– – 13
Taxes calculated/considered 20 16 14+ 24 12
Total 19 14 12 26 11
Electroniccopy
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Exhibit 5
Multinomial Logit Results
Mulitnomial logit estimates are presented of the factors that affect the decision tool most frequently used to assess the
financial viability of a project. All of the dependent variables are 1/0 variables that take a value of 1 if the method of
investment evaluation in each column is reported for large investments. The omitted choice is Gut Feel; thus the
significance of the coefficients should be interpreted as the effect on the log odds of the evaluation tool choice relative to
Gut Feel. In each case where there is a set of 1/0 variables for the independent variable, the omitted variable is identified
and significance should be interpreted relative to this omitted variable. *** indicates significance at the 0.01 level, **
significance at the 0.05 level and * significance at the 0.10 level. The observations included in these estimates are
limited to those respondents reporting one of the five investment analysis techniques, which limits the sample size to 583
observations.
Payback Rate of Return DCF Combination
Coeff Std Err Coeff Std Err Coeff Std Err Coeff Std Err
Industry
Manufacturing/construction 0.221 0.332 0.512 0.383 0.040 0.399 0.512 0.379
*
Retail/wholesale -0.063 0.287 0.621 0.333 0.259 0.334 -0.505 0.362
Service/other (omitted)
10 percent or higher (omitted)
No change (+/- 10 percent) 0.374 0.296 -0.142 0.336 0.347 0.360 0.250 0.356
-10 percent or lower -0.330 0.305 -0.420 0.338 0.226 0.342 -0.252 0.366
Business age
Under 6 years (omitted)
6-10 years 0.151 0.362 -0.216 0.411 -0.179 0.400 0.349 0.489
** ***
11-20 years 0.451 0.381 0.924 0.391 0.314 0.403 1.404 0.485
***
20+ years 0.604 0.384 0.442 0.422 -0.482 0.461 1.671 0.499
Employment
Under 4 (omitted)
** * **
10-Apr -0.666 0.278 -0.570 0.310 -0.346 0.321 -0.838 0.336
**
Over 10 -0.503 0.331 -0.336 0.358 -0.243 0.397 -1.067 0.418
College (BA or AA) 0.251 0.268 0.299 0.287 -0.206 0.322 0.085 0.327
** **
Graduate school 0.915 0.388 0.059 0.461 0.683 0.439 1.104 0.472
No college (omitted)
Owner age
*** ***
Under 35 1.367 0.486 0.249 0.578 0.448 0.551 1.712 0.603
** *
35-44 0.448 0.371 0.881 0.374 0.565 0.378 0.803 0.441
**
45-54 0.432 0.296 0.164 0.336 -0.845 0.384 0.089 0.370
55 up (omitted)
* **
Wait for cash 0.426 0.241 -0.084 0.269 0.593 0.280 -0.452 0.305
Investment type
Replacement (omitted)
* **
Expand product line 0.381 0.313 0.640 0.339 0.880 0.343 -0.018 0.395
**
New product line 0.255 0.305 0.637 0.322 0.031 0.377 0.334 0.361
Planning tools
*** ** ** ***
Cash flow projection made 1.297 0.286 0.635 0.296 0.731 0.323 1.157 0.357
Written business plan -0.041 0.275 0.363 0.297 0.422 0.308 0.397 0.322
** *** **
Taxes calculated/considered -0.047 0.274 0.744 0.344 1.020 0.394 0.762 0.388
** *
Constant -3.836 1.512 -1.849 1.646 -0.461 1.738 -3.402 1.898
Electroniccopy
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Nama Morris G. Danielson St. Bidang penganggaran Tanggal 3 juli 2018
Pitcher/peneliti Joseph’s, Jonathan A. Peminatan modal usaha Submit
kecil
(A) Judul Penelitian Praktik Penganggaran Modal Usaha Kecil
(B) Pertanyaan Penelitian ini menganalisis praktik anggaran modal dari bisnis kecil, dengan
Penelitian Mendasar menyoroti pengaruh karakteristik pemilik, penggunaan alat evaluasi proyek yang
kurang canggih, dan tantangan unik yang dihadapi bisnis kecil dalam
penganggaran modal.
(C) Artikel rujukan Ang, J. (1991). "Small Business Uniqueness and the Theory of Financial
utama Management." The Journal of Small Business Finance, 1(1), 1-13. [5]
Petersen, M., & Rajan, R. (1994). "The Benefits of Firm-Creditor Relationships:
Evidence from Small Business Data." Journal of Finance, 49(1), 3-37. [2]
Vos, A., & Vos, E. (2000). "Investment Decision Criteria in Small New Zealand
Businesses." Small Enterprise Research, 8(1), 44-55.
(D) Motivasi/Puzzle Penelitian ini bertujuan untuk mengungkap praktik anggaran modal yang umum
digunakan oleh bisnis kecil, dengan fokus pada pengaruh karakteristik pemilik dan
alat evaluasi proyek yang kurang canggih. Motivasi utama penelitian ini adalah
untuk memahami mengapa bisnis kecil cenderung menggunakan metode evaluasi
investasi yang kurang canggih, seperti intuisi pemilik dan periode pengembalian
modal, daripada analisis arus kas diskonto. Selain itu, penelitian ini juga ingin
menyoroti tantangan unik yang dihadapi bisnis kecil dalam penganggaran modal,
serta menawarkan rekomendasi yang dapat disesuaikan dengan kebutuhan
khusus bisnis kecil dalam pengambilan keputusan investasi.
TIGA Tiga aspek utama dari setiap penelitian empiris, yaitu pedoman “IDioTs: Ide,
Data, dan Tools”
(E) Ide? Debat akademis dalam topik penelitian ini berkaitan dengan penggunaan alat
evaluasi proyek yang kurang canggih oleh bisnis kecil, serta pengaruh karakteristik
pemilik dan tantangan unik yang dihadapi bisnis kecil dalam penganggaran modal.
Hipotesis utama mungkin termasuk bahwa bisnis kecil cenderung menggunakan
metode evaluasi investasi yang kurang canggih karena keterbatasan sumber daya,
kurangnya pendidikan formal pemilik, dan fokus pada kelangsungan hidup bisnis
daripada maksimalisasi nilai perusahaan. Variabel dependen utama adalah
metode evaluasi investasi yang digunakan oleh bisnis kecil, sementara variabel
kontrol/independen meliputi karakteristik pemilik (usia, pendidikan), ukuran
bisnis, dan tantangan finansial. Terdapat potensi endogenitas terkait dengan
karakteristik pemilik yang dapat memengaruhi pilihan metode evaluasi investasi.
Strategi identifikasi endogenitas dapat melibatkan penggunaan variabel
instrumental, seperti kejutan eksternal atau perubahan kebijakan yang
mempengaruhi pemilihan metode evaluasi investasi
(F) Data? (1) Data yang digunakan untuk penelitian ini berasal dari survei National
Federation of Independent Business (NFIB) yang dilakukan oleh Gallup
Organization pada bulan April dan Mei 2003. S. Tipe datanya khusus untuk usaha
kecil dan praktik penganggaran modalnya
(2) Sampel yang digunakan dalam penelitian ini terdiri dari 792 observasi
(3) Tidak, penelitian ini tidak menggunakan data panel
(4) Data untuk penelitian ini dikumpulkan untuk Yayasan Penelitian Federasi
Nasional Bisnis Independen (NFIB) oleh Organisasi Gallup pada bulan April dan
Mei 2003 dari sampel perusahaan kecil, yang didefinisikan sebagai bisnis yang
mempekerjakan setidaknya satu individu selain pemilik, tetapi tidak lebih dari
249.
(5) Ketersediaan data atau observasi mungkin tidak menimbulkan masalah karena
penelitian ini menggunakan data yang dikumpulkan untuk Yayasan Penelitian
National Federation of Independent Business (NFIB) oleh Organisasi Gallup.
(6) Meskipun penelitian ini tidak secara eksplisit menyebutkan variabilitas variabel
yang diuji, proses pengumpulan data dan ukuran sampel yang besar menunjukkan
bahwa kemungkinan terdapat variabilitas yang cukup untuk memberikan
kesimpulan yang kuat.
(7) Penelitian ini tidak secara eksplisit menyebutkan kendala data lain seperti
validitas eksternal atau validitas konstruk. Namun, penting untuk
mempertimbangkan potensi keterbatasan terkait validitas eksternal data.
(G) Alat (Tool) Kerangka empiris dan desain penelitian dari penelitian ini melibatkan penggunaan
Analisis? data survei yang dikumpulkan oleh National Federation of Independent Business
(NFIB) untuk menganalisis praktik penganggaran modal perusahaan kecil. Studi ini
menggunakan model logit multinomial untuk bersama-sama mengidentifikasi
faktor-faktor yang mempengaruhi pilihan alat evaluasi proyek. Teknik ini cocok
bila respons yang tidak berurutan, seperti seperangkat alat evaluasi proyek,
mempunyai lebih dari dua hasil. Hasil dari latihan ini dilaporkan pada Gambar 5
penelitian .
DUA Dua pertanyaan kunci
(H) Apa Yang Baru? Penelitian ini tidak secara eksplisit menyebutkan kebaruan dalam hal ide, data,
atau alat analisis yang digunakan. Namun, hal baru dari penelitian ini mungkin
terletak pada fokusnya pada praktik penganggaran modal di perusahaan kecil,
khususnya yang mempekerjakan setidaknya satu individu selain pemilik tetapi
tidak lebih dari 249 orang. Fokus pada usaha kecil dan praktik penganggaran
modalnya mungkin menjadi “lokomotif” utama kebaruan, yang mendorong
potensi kebaruan sekunder dalam analisis dan interpretasi data
(I) So What? Mengetahui jawaban atas pertanyaan penelitian ini penting karena hasil
penelitian dapat memberikan wawasan yang berharga tentang praktik
penganggaran modal bisnis kecil. Dengan pemahaman yang lebih baik tentang
faktor-faktor yang memengaruhi pilihan alat evaluasi investasi, pemilik bisnis dan
pengambil keputusan dapat membuat keputusan investasi yang lebih
informasional dan tepat. Hasil penelitian ini juga dapat memengaruhi kebijakan
dan praktik bisnis, serta memberikan panduan bagi pengembangan alat evaluasi
investasi yang lebih sesuai dengan kebutuhan bisnis kecil. Dengan demikian,
penelitian ini dapat memberikan kontribusi yang signifikan bagi pemilik bisnis,
pengambil keputusan, dan praktisi dalam mengelola investasi dan penganggaran
modal.
SATU Satu bottom line
(J) Kontribusi? Kontribusi penelitian ini terletak pada fokusnya pada praktik penganggaran modal
di perusahaan-perusahaan kecil, khususnya yang mempekerjakan setidaknya satu
orang selain pemilik, tetapi tidak lebih dari 249 orang. Fokus pada usaha kecil dan
praktik penganggaran modal mereka mungkin menjadi faktor utama dalam hal ini.
"lokomotif" kebaruan, mendorong potensi kebaruan sekunder dalam analisis dan
interpretasi data . Studi ini memberikan wawasan berharga mengenai faktor-
faktor yang mempengaruhi pilihan alat evaluasi proyek di perusahaan kecil,
menyoroti bagaimana perusahaan-perusahaan ini membuat keputusan investasi
dan mengapa mereka menggunakan pendekatan tertentu. Hal ini berkontribusi
pada literatur dengan memberikan pemahaman yang lebih mendalam tentang
praktik penganggaran modal yang unik pada perusahaan kecil, yang mungkin
berbeda dari praktik penganggaran modal pada perusahaan besar.
(K) Hal lain yang Kolaborasi dengan pihak lain dalam hal ide, data, dan alat analisis dapat
perlu diperhatikan? memberikan manfaat yang signifikan. Kolaborasi dengan peneliti lain atau praktisi
bisnis dapat membantu dalam mengembangkan ide yang lebih komprehensif dan
memperluas cakupan data yang tersedia. Kolaborasi juga dapat memperkaya alat
analisis yang digunakan, memungkinkan pendekatan yang lebih holistik dalam
menganalisis data.
Dalam hal jurnal yang ditarget, realistisnya akan tergantung pada tingkat
kontribusi penelitian terhadap literatur yang ada. Jika penelitian ini memberikan
wawasan yang signifikan tentang praktik penganggaran modal bisnis kecil, maka
publikasi di jurnal yang fokus pada keuangan bisnis kecil atau manajemen
keuangan dapat menjadi target yang realistis. Namun, jika penelitian ini tidak
memberikan kontribusi yang signifikan, maka publikasi di jurnal yang lebih umum
mungkin lebih realistis .
Dalam hal penilaian risiko, terdapat beberapa risiko yang perlu dipertimbangkan.
Risiko "tidak ada hasil" mungkin terjadi jika penelitian ini tidak memberikan
wawasan yang signifikan atau tidak menghasilkan temuan yang dapat diandalkan.
Risiko "kompetitor" mungkin terjadi jika penelitian serupa telah dilakukan oleh
peneliti lain. Risiko "keusangan" mungkin terjadi jika penelitian ini tidak lagi
relevan atau tidak memberikan kontribusi yang signifikan terhadap literatur yang
ada. Selain itu, terdapat risiko etis dan perizinan yang perlu dipertimbangkan,
terutama terkait dengan penggunaan data survei dan perlindungan informasi
pribadi responden .
Tantangan serius yang mungkin dihadapi dalam pengeksekusian proposal ini
termasuk akses terhadap data yang relevan, keterbatasan sumber daya untuk
analisis yang komprehensif, dan kemungkinan kendala etis terkait

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THE CAPITAL BUDGETING DECISIONS OF SMALL BUSINESSES

Economic Census over 50 percent are in agriculture, manufacturing, construction, transportation,

of very small firms.1

used by small firms.

level, and business age.

because of time constraints.

Certainly a lack of sophistication contributes to these results, as over 50 percent of the

imposed) capital constraints.2

eting analysis can differ between large and small firms.

I. Capital Budgeting Theory and Small Firms

capital budgeting tools, such as payback period or accounting rate of return.

ing decision tool for every small firm.

A. Capital Budgeting Assumptions and the Small Firm

sent value projects (Brealey and Myers, 2003).

unemployment, as a way to avoid employment boredom (i.e., as a life-style choice), or as a vehi-

sis, such as the payback period.4

project will generate cash flows (i.e., the payback period).

B. Cash Flow Estimation Issues

directly related to current activities.

related to the type of investment under consideration.

II. Description of Data

Exhibit 1 summarizes the demographic characteristics of the sample—industry, sales

group responses into three to five categories.

Insert Exhibit 1 here

planning processes in place.

capital budgeting alternatives.

derstanding of how capital budgeting alternatives should be evaluated.

phisticated methods (see Graham and Harvey, 2001).

III. Survey Results

evaluation tools is related to a set of firm characteristics.

cash to fund the project.

Insert Exhibit 2 here

mean when the business owner is younger than 44.7

ing expansion into new product lines.

wait for cash than firms with younger owners.

decisions, contrary to capital budgeting theory.

planning horizon of its owners.

Insert Exhibit 3 here

promising opportunities in the future.

straints (incomplete management teams) may hamper small firms in planning.

by 26 percent of the sample firms.8

Insert Exhibit 4 here

rely on gut feel.

relatively unsophisticated methods of analysis to evaluate replacement options.

a discounted cash flow analysis of these investments can be difficult.

quickly could benefit a firm by easing future cash flow constraints.

the small firms.

strongly related to any of the firm characteristics listed in Exhibit 4.

more sophisticated methods of project analysis.

To provide a multivariate perspective on how small firms make investment decisions, we

tools, has more than two outcomes.

Insert Exhibit 5 here

how firms evaluate projects.

discounted cash flow method of analysis.

have incomplete management teams. Therefore, a lack of financial sophistication is an

liquidity (such as the payback period) when making investment decisions.

capital budgeting theory for small firms remains unanswered.

(A) Judul Penelitian Praktik Penganggaran Modal Usaha Kecil

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