Evaluation Of Capital Budgeting In Public Sector Organizations In Nigeria

Evaluation Of Capital Budgeting In Public Sector Organizations In Nigeria

Abstract

Typically, capital budgeting decisions involve significant expenditures on new assets. These decisions are especially crucial because the firm loses a substantial amount of its flexibility when focusing on projects, and because budgeting decisions determine the strategic trajectory of the organization. The capital budgeting process in the local government of Ikorodu is crucial and must be approached with great care. This initiative aims to raise awareness about capital budgeting in local government in Nigeria. Variation in Ikorodu local government capital budgeting has been observed, necessitating this study, which aimed to raise the standard. In order to accomplish this, the initiative has examined numerous authors’ past works and related literatures. The study’s data were comprised of primary data. For appropriate and accurate responses, interviews and questionnaires were utilized. The queries were closed-ended in nature. This was done to empower the respondents, and chi-square analysis was used to determine the outcome.

Quantitative factors (monetary measure of costs and benefits) and qualitative factors (non-monetary measure of costs and benefits) are considered when making capital budgeting decisions. It is not always possible to precisely quantify the costs and benefits of a project, making capital budgeting decisions particularly challenging for non-profit organizations such as national and local government organizations.

The following is a summary of the study’s most significant findings:

i.There is a correlation between Ikorodu Local government efficiency and optimal resource allocation.

ii.There is a correlation between Ikorodu Local Government efficiency and optimal resource allocation.

iii.Effectiveness and efficacy of capital budgeting increase Ikorodu Local government’s revenue generation.

Based on the aforementioned summary of key findings, it can be concluded that capital budgeting is extremely important for public sector organizations.

It was suggested that capital budgeting facilitates the planning of annual operations, the coordination of the activities of the various sections of the organization, the communication of plans to various responsibility centre managers, and the motivation of managers to achieve organizational objectives. Controlling activities and evaluating the performance of governmental institutions or the government enables the management of a nonprofit organization to make more informed decisions regarding the allocation of resources to satisfy the organization’s overall objectives.

Second Part

Introduction

1.1 Context For The Study

Budgeting occupies or plays a strategic or crucial role in every organization, whether they are publicly or privately owned. The evaluation or function of capital budgeting cannot be diminished as a result of its evaluation in financial decision-making.

Different authors, academicians, and schools of thought have defined budgeting differently, but it has the same or essentially the same meaning.

According to the Institute of Cost and Management Accounting, budgeting is a financial and quantitative statement prepared on capital expenditures prior to a specific period of time that outlines the policy to be pursued in order to achieve a given goal.

Capital budgeting, according to G.C. Philipalys, is the allocation of a company’s financial resources among the available market opportunities.

According to Omolehinwa (2005), budgeting involves planning, the development of available capital, and the maximization of the enterprise’s long-term profitability.

Budgeting encompasses all processes associated with the investment of resources in long-term projects in anticipation of profit or the provision of essential services to the public through the acquisition of property, buildings, and other capital projects.

Rarely are the resources of a nation or society allocated to its constituents by market forces or mechanisms (price), but rather by means of public decision making. The principles that govern the allocation of public resources ensure that the resources are allocated so that the public’s goals are met through an efficient and effective budgeting system.

In addition, capital budgeting is the planning process used to determine whether a company’s long-term investments, such as new machinery, replacement machinery, new plants, new products, and research and development projects, are worthwhile. Capital budgeting is the process of analyzing a company’s potential investments. The capital budgeting decisions that financial administrators must make are likely the most crucial. Typically, capital budgeting decisions entail substantial investments in new assets. The firm loses a substantial amount of flexibility by committing to a project, and budgeting decisions determine the strategic trajectory of the organization. The following are examples of capital budgeting proposal types:

1. Replacement/Modification of Fixed Assets – e.g., a building’s roof. The replacement of worn-out or obsolete items at the appropriate time

2. Expansion — entails the addition of production capacity to existing facilities.

3. Modernization of investment expenditures facilitates cost reduction and may coincide with replacement decisions.

4. Proposal for a strategic investment — these are budgeting decisions that do not presume the return will be immediate or measured over an extended period of time. Strategic investments can be made for defensive, offensive, or hybrid reasons. Vertical integration is an example of a defensive investment that assumes a continuous supply of basic materials. Horizontal combinations are offensive investments because they promote the internal and external development of a business. Research and development expenditures are investments with mixed motivations.

5. Diversification of business — entails operating in multiple markets or expanding from one market to another; it may also involve modifying product lines.

6. Research and development — where technology is swiftly evolving, research and development is a continuous activity for any business. Typically, large sums of money are invested in research and development activities, resulting in capital budgeting decisions.

1.2 Statement Of Research Problem

This research will primarily investigate and highlight the problems facing publicly owned organizations due to their inability to implement efficient allocation of resources, equitable distribution of income through the use of taxation, and stabilization of the economy through capital budgeting, and how it affects their service delivery to the people, high lost and inadequate capital, inadequate human resources, unpredictable social and economic factors, and poor policy formulation.

1.3 Research Questions

(1) Does Ikorodu Local Government’s Capital Budgeting effectively relate to public revenue?

(2) Does Ikorodu Local Government’s Capital Budgeting correspond to capital projects funded by internal revenue?

1.4 Purpose Of The Study

The purpose of this study is to evaluate capital budgeting in financial organizations. As a result, the following steps will be taken to achieve the goal of this project.

(i) To evaluate the application of capital budgeting within a company.

(ii) Examine capital budgeting and its impact on the organization’s financial performance.

(iii) Determine the utility of capital budgeting in carrying out the organization’s activities.

(iv) To call attention to the challenges associated with the application of the capital budgeting system and to make recommendations for its enhancement.

(v) To evaluate the impact of capital budgeting on an organization’s financial performance.

1.5 Importance of the Research

This research will attempt to demonstrate how the Public Sector can implement Capital Budgeting to achieve the intended outcomes for the public. In addition to contributing to the corpus of knowledge, this will benefit society as a whole.

In light of the debates over the optimal level of the public capital stock, a capital budget as a policy instrument could prompt policymakers to consider capital expenditure more carefully. This does not imply that capital budgeting cannot lead to misconduct, or that large capital items cannot be accounted for in annual expenditure plans and concealed from public view, except by analysts with specialized knowledge. In this regard, some political issues are pertinent — that is, the foundation of a capital.

Local Government Capital Budgeting in Nigeria is crucial and must be approached with diligence.

The rate of economic development in Nigeria’s local government has been relatively sluggish due to the state government’s continued erosion of their authority and intrusion into what would have been the local government’s exclusive domain at the most fundamental levels. Thankfully, the situation has changed now that the functions of local administrations, sources of revenue, and other responsibilities are protected by the constitution. Therefore, the government must accelerate the rate of economic development.

1.6 Research Hypotheses

(1) H0: Ikorodu Local Government’s Capital Budgeting system does not enhance the efficiency of resource allocation.

Capital Budgeting increases the efficiency of resource allocation in Ikorodu Local Government

(2) H0: There is no capital project corresponding to the Internal Revenue campaign in Ikorodu Local Government.

H1: Ikorodu Local Government has a corresponding capital project resulting from the Internal Revenue Service’s campaign.

1.7 Radius And Restrictions Of The Study

This research study will attempt to illustrate the Capital Budgeting practices available in the Public Sector. This investigation will focus on capital budgeting in Ikorodu Local Government.

1.8 Definition Of Terms

Capital Budgeting: It is the process of investing resources in long-term projects with the expectation of generating a profit or providing essential services to the public through the acquisition of land, buildings, and machinery.

A budget is a plan that details how much money you have and how much you spend. A reasonable budget enables you to pay off debts and save for the proverbial “rainy day.”

Accounting Rate of Return: The discount rate frequently employed in capital budgeting that makes the net present value of all cash flows from a specific project equal to zero. In general, the higher the internal rate of return of a project, the more desirable it is to undertake the project.

NPV is the sum of the present value of all cash benefits minus the present value of all cash.

Profitability Index (PI): Also known as the ‘Benefit Cost Ratio’, it is the ratio of the present value of future cash benefits, at the required rate of return, to the initial cash expenditure of the investment.

A limiting factor is anything that limits the activity of an entity; examples of limiting factors include scarcity of a resource’s supply and restrictions on sales at a specific price. In other words, the limiting factor is the one factor that dominates all others, and it can be any factor that is essential to the organization’s operation.

Public Sector: The public sector is one of the greatest sectors of any economy, comprising approximately 20% of the total economy. It includes national and local administrations, as well as their agencies and chartered organizations.

Monetary policy is the method by which a nation’s monetary authority regulates the money supply, typically by designating an interest rate to promote economic growth and stability.

Public Revenue: The study of public finance is an in-depth examination of all state-related financial operations, and is therefore concerned with the total income and expenditures of all public authorities and administrative structures.

Capital expenditures: expenditures that produce future benefits. A business incurs a capital expenditure when it spends money to acquire fixed assets or to increase the value of an existing fixed asset with a useful life extending beyond the taxable year.

This is a judgment regarding the method of raising funds that will be used for acquisitions; it is a financial decision.

depends on a company’s ability to issue and service debt

equity investments.

Profitability: A category of financial metrics used to evaluate a company’s ability to generate earnings relative to its expenses and other pertinent costs incurred during a specific time period.

Market forces or mechanism: The aggregate influence of self-interested buyers and sellers on the price and quantity of products and services offered in a market. In general, excess demand causes prices and supply quantities to rise, whereas excess supply causes them to decline.

Sharp practices include making deceptive statements or threats, disregarding agreements, improperly utilizing process, and/or employing other deceitful and/or dishonorable means that are barely legal.

Investment capital is the capital that a business has invested or can invest in itself. It is computed by aggregating the long-term debt, stock, and retained earnings of the company. A person’s net worth and long-term debt may also be considered.

The term development is used in a variety of contexts and is qualified as economic development, human development, global development, democratic development, and social development. In this context, the first two terms warrant special consideration.

Operating budgets: the Operating Budget represents an estimate of future expenses; this is an accrual-based accounting figure; the Disbursements for Operating Expenses Budget, a subset of the Operating Expenses Budget, governs a company’s cash flows.

The study of the surface shape and features of the Earth and other observable astronomical objects, such as planets, moons, and asteroids, is referred to as topography.

Comparing two or more alternatives for achieving a specific objective under the provided assumptions and constraints.

Capital rationing: a condition that exists when there is an inadequate supply of capital.

Upper-dollar limit on the quantity of available capital

to commit to capital asset acquisition.

Drainage: Heavy or clay-like soils tend to drain inadequately, whereas sand-dominated soils drain quickly. Neither extreme is desirable for most plants, which is one of the reasons why humus content is essential to their survival.

References

Public Sector Accounting and Finance, Corporate Publishers Ventures, Lagos, R.A. Adams, 2002.

Inventory of Infrastructure Facilities in Lagos State, Balogun Yinka (1991).

Biodun Jimoh, 2003, Principles of Finance, Walex printer, 100 Bangbose, Lagos, Nigeria.

Introducing Capital Budgeting into the Public Sector, Doughlas Auld (1993).