Case Study about Capital Budgeting Decisions of Small Businesses
Abstract: This paper uses survey data compiled by the National Federation of Independent Business 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 unsophisticated project evaluation tools.
This paper analyzes the capital budgeting practices of small firms. The U.S. Small Business 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 private 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 investments in the small business sector are important to both the individual firms and the overall economy.
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