THE CAPITAL BUDGETING DECISIONS OF SMALL BUSINESSES

Morris G. Danielson · William Petty · Participants At

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Capital Investment and Risk Analysis Corporate Finance and Governance Working Capital and Financial Performance

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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References

2001The theory and practice of corporate finance: evidence from the field 2004The Cash Flow Sensitivity of Cash 1995The Effect of Credit Market Competition on Lending Relationships 1998The importance of relationships to the availability of credit 1991Small Business Uniqueness and the Theory of Financial Management 2004Bank Loan Availability and Trade Credit Demand 1993The Benefits of Firm-Creditor Relationships: Evidence from small business data 1983AN ANALYSIS OF THE FINANCIAL MANAGEMENT TECHNIQUES CURRENTLY EMPLOYED BY LARGE U.S. CORPORATIONS

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