An investigation of the usage of capital budgeting techniques by small and medium enterprises
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An investigation of the usage of capital budgeting techniques by small and medium enterprises Lakshman Alles1 · Ruwan Jayathilaka1 · Nelum Kumari1 · Taraka Malalathunga1 · Hashini Obeyesekera1 · Selvaraj Sharmila1 Accepted: 29 August 2020 © Springer Nature B.V. 2020
Abstract 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. Keywords Capital budgeting · Small and medium enterprises (SMEs) · Sri Lanka · NPV · IRR · Payback period * Ruwan Jayathilaka [email protected]; [email protected] Lakshman Alles [email protected] Nelum Kumari [email protected] Taraka Malalathunga [email protected] Hashini Obeyesekera [email protected] Selvaraj Sharmila [email protected] 1
Department of Business Management, SLIIT Business School, Faculty of Business, Sri Lanka Institute of Information Technology, New Kandy Road, Malabe, Sri Lanka
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1 Introduction Small and Medium Enterprises (SME) are considered as the engine driving a country’s economy. “The development of SMEs can be an aid to promote balanced regional development” (Yogendrarajah et al. 2015). The SME sector would become a major contributor for developing countries which are burdened by poverty and unemployment problems. Moreover, these countries have the potential to expand and create employment opportunities. Furthermore, SMEs are recognised as the driving force in any country for promoting the growth of gross domestic product (GDP) and embarking on innovations. This is also valid in the case of Sri Lanka. The economic contribution of SMEs to the wider national economy is reported to be as high as 80% (National Human Resources and Employment Policy 2020). In Sri Lanka, SMEs consist of more than 75% of the total number of enterprises, provides 45% of the e
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