The Impact of Capital Budgeting on Organizational Performance
OBJECTIVE OF THE RESEARCH
- To determine the nature of capital budgeting
- To determine the nature of organizational performance
- To determine the impact of capital budgeting on organizational performance
- To determine the impact of capital budgeting on the performance of ondo state ministry of works.
REVIEW OF LITERATURE
Our focus in this chapter is to critically examine relevant literatures that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.
Precisely, the chapter will be considered in three sub-headings:
- Conceptual Framework
- Theoretical Framework
- Empirical Review and
Capital budgeting is a process in which a business determines whether projects such as building a new plant or investing in a long term venture are worth or not. Most of times, a prospective project’s lifetime cash inflow and outflows are assessed in order to determine whether the return generated meet a sufficient target. Capital budgeting is also known as Investment Appraisal. Ideally, business should do all those projects and opportunities which enhance shareholders value. Generally, businesses prefer to study a project before taking it on, as it has a great impact on the company’s financial performance. Capital budgeting is an important tool. One important duty of a financial manager is to choose investments with satisfactory cash inflows and rate of return. A financial manager should be able to decide if an investment is worth undertaking and should also have the ability to choose intelligently given other alternatives. Capital budgeting is primarily concerned with sizable investments in long term assets. These assets can either be tangible items such as property, plant & machinery or intangible ones such as new technology, patents or trademarks. Investments in processes such as research, design and development and testing- through which new products are created may also be viewed as investments in tangible assets. (Don Dayananda et al 2002)
Financial management largely concerns with financing, dividend and investment decisions of the firm. Corporate finance theory has developed around a goal of maximizing the market value of the firm to its shareholders, which is also known as shareholder wealth maximization.
Financial decision deal with the firm’s optimal capital structure in terms of debt & equity Investment decisions deal with the funds raised in financial market are employed in productive activities to achieve the firm’s overall goal, or we should say, how much should be invested and what assets should be invested in.(Don Dayananda et al 2002)
In reality, many firms have limited borrowing resources that should be allocated among the best investment alternatives. Many people would argue that a company can issue an almost unlimited amount of capital stock to raise capital. Increasing the number of shares of company stock will serve only to distribute the same amount of equity among a greater number of shareholders.
In other words, as the number of shares of a company increases, the company ownership of individual stockholder may proportionally decreases. The argument that capital is a limited resource is true of any form of capital, whether debt or equity or retained earnings, accounts payable or notes payable and so on. Even the best-known firm in an industry increases its borrowings up to a certain limit. Once this point has reached, the firm will either be denied more credit or be charged a higher interest rate. Faced with limited sources of capital, management should carefully decide whether a particular project is economically acceptable. In the case of more than one project, management must identify the projects that will contribute most to profits and to the value of the firm. This is the basis of Capital Budgeting.
Capital Budgeting Process
There are different sequential stages in the capital budgeting process. The capital budgeting process is a multi-faceted activity. The sequential stages of a capital budgeting process can be depicted in a simple flow chart below:
Organization: the act of organizing a business or an activity related to a business; “he was brought in to supervise the organization of a new department”.
It follows that no one way to assess performance will address all situations. Further complication is introduced by time – indicators of past performance, current performance, and predictors of future performance. To add the mix, performance assessment must allow for organizational energy and resources deferred from current performance to preparing for future performance, and also account for relative emphasis between effectiveness and efficiency.Dagrou, E., Gauvin, L., &Halliwell, W. (1992).
It could be referred as the actual design of the organization which specifies the type of the business of the organization and where it intends to position itself in the future. It translates the organization’s corporate goal into specific policies and directions, set priorities, specifies the structural, strategic and tactical areas of business development and guides the planning process. (Drury et al. 1993)
An organization’s vision & mission is also embedded in its strategic planning. The feedback to strategic planning during project evaluation and decision stages is very critical as it affects
Proposals which are through to the preliminary screening phase are subjected further to rigorous financial appraisal to ascertain if they add value to the organization. This stage is also called quantitative analysis, economic and financial appraisal, project evaluation or simply project analysis. It predicts the expected future cash flows of the project, analyze the risks associated with those cash flows, develop alternative cash flow forecast, examine the senility of the results, subject the cash flow to simulation and prepare alternative estimate of the project’s net present value (Brian Baldwin 1997).
The basic concepts, principles and techniques of project evaluation are same for different projects while their application to particular types of projects needs special knowledge and expertise. For example: asset expansion projects, asset replacement, & international investment and so on .It should be noted that if the projects identified within the current strategic framework of the organization repeatedly produce negative NPVs in the analysis stage, these results send a warning signal to the management to review its strategic plan. Therefore the feedback from project analysis to strategic planning is important in the overall capital budgeting process.
Stage 1: Investment screening and selection Projects consistent with the corporate strategy are identified by production, marketing, and research and development management of the firm. Once identified, projects are evaluated and screened by estimating how they affect the future cash flows of the firm and, hence, the value of the firm.
Stage 2: Capital budget proposal A capital budget is proposed for the projects surviving the screening and selection process. The budget lists the recommended projects and the dollar amount of investment needed for each. This proposal may start as an estimate of expected revenues and costs, but as the project analysis is refined, data from marketing, purchasing, engineering, accounting, and finance functions are put together.
Stage 3: Budgeting approval and authorization Projects included in the capital budget are authorized, allowing further fact gathering and analysis, and approved, allowing expenditures for the projects. In some firms, the projects are authorized and approved at the same time. In others, a project must first be authorized, requiring more research before it can be formally approved. Formal authorization and approval procedures are typically used on larger expenditures; smaller expenditures are at the discretion of management.
Stage 4: Project tracking after a project is approved, work on it begins. The manager reports periodically on its expenditures, as well as on any revenues associated with it. This is referred to as project tracking, the communication link between the decision makers and the operating management of the firm. For example: tracking can identify cost over-runs and uncover the need for more marketing research.
Stage 5: Post-completion audit following a period of time, perhaps two or three years after approval, projects are reviewed to see whether they should be continued. This revaluation is referred to as a postcompletion audit. Thorough post completion audits are typically performed on selected projects, usually the largest projects in a given year’s budget for the firm or for each division. Postcompletion audits show the firm’s management how well the cash flows realized correspond with the cash flows forecasted several years earlier.
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description.
This study was carried out to examine the impact of capital budgeting on organizational performance using Ondo state Ministry of Works as a case study. The staff of Ondo state Ministry of Works form the population of the study.
DATA PRESENTATION AND ANALYSIS
CONCLUSION AND RECOMMENDATION
In this study, our focus was to examine the impact of capital budgeting on organizational performance using Ondo State Ministry of Works as a case study. The study specifically was aimed at ascertaining if Capital budgeting is significant in Ondo state ministry of works, if organizational performance in Ondo state ministry of works is high and if the impact of capital budgeting on performance in Ondo state ministry of works is high.
The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent are active workers in the Ondo State Ministry of Works.
The findings revealed that Capital budgeting is significant in Ondo state ministry of works. The findings also revealed that organizational performance in Ondo state ministry of works is high. The findings further revealed that the impact of capital budgeting on performance in Ondo state ministry of works is high.
Based on the responses obtained, the researcher proffers the following recommendations:
Effort should be made by the Nigerian government and stakeholders in promoting and ensuring capital budgeting and implementation.
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