Academic journal article Ife Psychologia

Capital Budgeting, Government Policies and the Performance of SMEs in Nigeria: A Hypothetical Case Analysis

Academic journal article Ife Psychologia

Capital Budgeting, Government Policies and the Performance of SMEs in Nigeria: A Hypothetical Case Analysis

Article excerpt

Abstract

This paper examined capital assets investment decision of Small and Medium Enterprises in Nigeria using a hypothetical case. It explored extant literature with respect to inhibitors to SMEs and their common capital budgeting techniques and the role of Government policies in enhancing the business activities of the citizens. It was found that although, inadequacy of funds is the most notorious inhibitor to SMEs development in Nigeria, the inability and lack of skills to effectively and efficiently allocate those financial resources can exacerbate their financial crises. The paper also used a hypothetical example to ex-ray the importance of using DCF methods of investment appraisal leading to the conclusion that sound investment decisions through the application of appropriate evaluation techniques are critical to SMEs long term fortune. It therefore recommended the application of discounted cash flow techniques such as NPV, IRR or even other more sophisticated methods by SMEs in evaluating their capital projects, as a panacea to their financial quagmire.

Key Words: Capital Budgeting, Small and Medium Enterprises, Discounted Cash Flow, Government Policies and Nigeria

(ProQuest: ... denotes formulae omitted.)

Introduction

Capital investment decision or Capital budgeting is one of the most important financial decision areas of any business enterprise. The quality of this decision requires great deal of skills & competence to handle, as it not only serves as a fulcrum to other decisions, but determines the future success and profitability of the organisation (Van Horn & Wachowicz, 2005:304; Damilola, 2007:36). The four financial decisions include; investment decision (decision as to the type of projects to invest in, usually, based on its associated value, risk and return), financing decision (how such investments has to be financed, weighing the associated cost of fund), dividend decision (how the returns will be appropriated) and liquidity decisions (ensuring that both current assets and currents liabilities are properly balanced to eschew adverse effect on the firms operations) (Pandey, 2005:4-5).

More so, the limitedness or inadequacy of resources available to firms further explains the cardinality of investment decisions, especial capital assets investment decisions, given the fact that resources have to be strategically allocated to viable project in order to leverage the cash flow potential of such investment. On the other hand the consequences of poor investment decision can be very devastating, to the investing organisation especially to firms with low capacity or abilities to absorb adverse results or huge loses like Small and Medium Scale Enterprises (SMEs).

Unfortunately, this is the most neglected area among researchers and policy makers, as research evidence on Investment decision or the investment appraisals methods used by SMEs and their impact on the their financial performance are rare. (Loizou, 2005; McMahon, 2003). Small and Medium Scale Enterprises (SMEs), in most developing countries are characterised by the paucity of capital and the lack of management and entrepreneurial skills and capacity (Sanusi, 2003; Olutunla, 2008; Umoren, 2003). Hence their inability to effectively analyse investment projects for sound investment decisions. These accounts substantially to situations were funds are channelled to project with either low or zero viability, translating into poor returns to investors or outright failure of the enterprise.

This paper therefore, focuses on the capital assets investment decision of SMEs in Nigeria, adopting a theoretical exploratory methodology, with the major objectives of identifying the most common methods of investment appraisal among SMEs, and to make suggestions as to the most effective methods of investment decision criteria, given their inherent vulnerability to risks. The paper is divided into four sections. Section one introduced the paper, section two deals with the definition of SMEs, its importance to economic development, its inhibitors as well as government efforts towards SMEs development in Nigeria. …

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