An investigation of the usage of capital budgeting techniques by small and medium enterprises

This paper examines the extent or usage of capital budgeting techniques in Small and Medium Enterprises (SMEs) and the effect of non-financial factors on the choice of capital budgeting techniques adopted by SMEs. A qualitative research method of content analysis as well as an econometric quantitative analysis have been employed for this study. The study has been conducted in several divisional councils within the district of Colombo, Sri Lanka. Stratified random sampling has been used to collect a sample of SMEs from each divisional council within these divisions. Information has been gathered through questionnaires and personal interviews. Results of the study reveal that Payback Period (PBP) is the dominant capital budgeting technique used in SMEs. Results of the Multinomial logistic regression indicate that the probability of selecting Net Present Value as the capital budgeting technique is higher in foreign SMEs and in SMEs who operate in the industry for 11 to 15 years. Furthermore, being a SME decision maker with less than 10 years of experience increases the probability of selecting PBP as the capital budgeting technique. Finally, qualitative techniques used in this study indicate that cost, time and knowledge are the main reasons that deter SMEs from using capital budgeting techniques.