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Then, discuss the reasons given for why small businesses often do not use the discounted cash flow method in capital budgeting decisions.

• Do you agree with the author?
• Why or why not?
• Should small businesses use the same techniques for capital budgeting analyses as larger firms? Why or why not?

Capital Budgeting Practices Utilized by Smaller, Privately Held Businesses Finance in ACTION Managerial While the techniques described in this chap- likely to be less sophisticated and educated in ter are intended to be used by the modern financial matters than the CFO of a larger cor- sophisticated business manager, not every- poration. The small businessperson's skills are one uses them. It is, however, true that survey more likely to be in designing products, meet- studies of large business firms over the pasting customer demands, and hiring and satisfy- decade have shown an increasing acceptance ing employees. of such concepts as discounted cash flow (as But rather than be too critical, we should also represented by the internal rate of return or net realize the second reason why small business present value methods) and weighted average owners might be using the payback method cost of capital or similar less sophisticated techniques. Small But what about people who do capital bud business owners must deal primarily with bank- geting analyses for smaller, privately held busi- ers or finance companies rather than stock- ness firms? Extensive studies show that only a holders or bondholders. When small business relatively small percentage of these firms (gen owners approach a banker for a loan to finance erally less than 20 percent) use discounted a capital investment, they should be prepared cash flow methods. For example, Runyon" to demonstrate their capacity to repay the loan found only 14.4 percent of his questionnaire within a set period of time rather than quote respondents in small business firms used the their internal rate of return or net present value. internal rate of return or net present value That is the reason the payback method is often approach. The rest used the payback method used, and the payback period required often is or some other unsophisticated approach. "the maturity the bank will allow on the loan." Why do large business firms use theoreti- cally correct approaches, while small business L. R. Runyon, "Capital Budgeting Decision Making firms do not? There are two primary reasons. in Small Firms." Journal of Business Research 11, The first is that the small business manager is pp. 389-97