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AN EVALUATION OF THE IMPACT OF CAPITAL BUDGETING ON ORGANISATIONAL PERFORMANCE

ACCOUNTING PROJECT TOPICS AND MATERIALS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Oxford dictionary which defines ‘organization’ as “an organized group of people with a particular purpose” ‘Performance’ is defined to include “the action or process of performing a task or function seen in terms of how successfully it is performed”. When these definitions are put together, we can say organisation performance relates to how successfully an organised group of people with a particular purpose perform a function. Essentially, this is what we are speaking about when we refer to organisational performance and achievement of successful outcomes. High organisational performance is when all the parts of an organisation work together to achieve great results with results being measured in terms of the value we deliver to customers. These parts are: Strategic objectives – provide the direction in which everyone within the organisation should head.

They provide focus and ensure we are all working towards the same end. Organisational structure – this represents the form in which the organisation will deliver its services. The structure must support the strategy just as the strategy must have regard to the structure. For instance, an on-line delivery strategy will not be successfully executed unless the organisation has on-line capabilities. Business performance measures – represent the measures by which each area of the organisation will be assessed.

There is no single set of measures that may be applied across all organisations. In order to be relevant and of use to the organisation, the measures must be determined in light of the organisation’s goals and the strategies put in place to achieve those goals. It is this measurement process that will direct behaviour more than any other system that may be put in place.

Further, the information must be easily obtainable – in a timely manner. This requires the management information systems to be developed to collect the right data in an efficient way. Allocation of resources and processes – relates to the decision making approach that takes place within the organisation. It is how the organisation goes about deciding where to apply its scarce resources – including money, time and effort – in order to achieve its objectives. Values, culture and guiding principles – this part is unique to the organisation. If the organisation was human, this would be its DNA.

The culture must support the achievement of the strategic objectives in order to draw out the “best” of people. The values and guiding principles must support the purpose (remembering from our earlier definition that an organisation is an organised group of people with a particular purpose) for achievement of desired outcomes. Reward structures – must reinforce the culture and direct efforts to support the achievement of strategic objectives.

Reward structures may include various forms – monetary (for example, bonus on achievement of short term goals), promotion (recognition of having acquired certain skills), celebration event (recognising and congratulating team efforts), leave of absence / day o (recognition and ‘thank you’ for a job well done), and so on. All these parts are inter-related and a change to one will impact one or more of the others. Similarly, one poor performing part will potentially negatively impact the others and lead to less than successful results.

So, what is organisational performance? It’s getting all of these parts to work in harmony in order to achieve great results. An eicient economic system calls for a dependable mechanism to allocate its resources. Christy (1966) describes that land, labour and capital are to be directed to their best uses, and should hence be placed in the hands of those who can use them most capably. In a market economy, this allocation process consists largely of a set of private decisions, which are directed by a network of free markets and flexible prices .

Important among these decisions are capital investments decisions that according to Northcott (1995) are vital at two levels: for the future operability of the individual firm making the investment, and for the economy of the nation as a whole.

At the firm level, capital investment decisions have implications for many aspects of operations, and often exert a crucial impact on survival,profitability and growth. At the national level, the proper planning and allocation of capital investment are essential to an efficient utilization of other resources, poorly placed investment reduces the productivity of labour and materials and sets a lower ceiling on the economy’s potential output. With this in mind it is no wonder that capital investment or capital budgeting is a central application of financial theory . the advantages and applications of sophisticated capital budgeting procedures based on cash flows, risk and the time value of money are seen as tools for maximizing shareholders’ wealth, which is the same as maximizing the value of the firm (Copeland & Weston, 1992).

This fact is often approximated to the relationship that firms using more sophisticated capital budgeting procedures should be able to perform better over time (Christy, 1966; Klammer, 1973). Empirical studies concerning the adoption of sophisticated capital budgeting procedures have shown that even though the degree of adoption has increased over time, there is an obvious “theory-practice gap” (Klammer, 1972; Schall, Sundem & Geijsbeek, 1978; and Graham & Harvey, 2001). The research therefore seek to evaluate the impact of capital budgeting on organizational performance.

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