Do SMEs Engage in Capital Budgeting Practices and Risk Analysis Techniques in Nigeria? Exploring the Evidence

Abstract

The paper explores capital budgeting practices and risk analysis techniques amongst SMEs in
Nigeria from the prism of contingency and wealth maximization theories. The study deploys
the use of self-administered questionnaire sent to respondents who are staff of SMEs
responsible for capital budgeting practices and risk evaluation .This consist of chief executive
officers, finance managers, financial controllers, accountants, account officers, finance
officer, director of finance and accounts and managers. The study finds low usage of capital
budgeting practices and risk analysis techniques. The payback period appears to be the most
frequently used method while reduced payback method is the most used risk analysis
technique. The dominant practices are in the order of payback method, internal rate of return
and net present value while the risk analysis techniques are reduced payback technique,
sensitivity analysis and scenario analysis. The findings have implication for capital structure
of SMEs given that the frequent use of PBM suggest emphasis in cash flow and short
duration to recoup investment. This underscores vividly that majority of the firms use
borrowed capital in their investments.The study contributes significantly to the growing body
of literature relating to capital budgeting practices and risk analysis techniques in general and
Nigeria in particular. It also provides useful findings that are important to policy makers,
practitioners, management and other stakeholders in SMEs.