Capital Budgeting Practices and Performance of Matatu Business in Kisii County, Kenya

Abstract

The study meant to determine how returns in Matatu industry are influenced by capital budgeting practices. Capital budgeting techniques, cost of capital, and operation costs were independently examined to determine the extent to which they influence performance of Matatu business in Kisii County. This study is important to the investors in the Matatu business as it seeks to inform them of the importance of capital budgeting techniques, its contribution to existing knowledge on capital budgeting techniques and how it will assist the regulators and other government agencies in policy formulation. The research employed a survey design where primary data was collected through the use of questionnaire, and stratified random sampling method was used to select respondents from the population. The study found out that most operators do not apply capital budgeting techniques in evaluating their investments and those that apply use payback period. Most of the operators interviewed practice intuitive management. According to the study, most operators favored a combination of equity and debt capital. The major reason for use of debt was the easy to access it at a lower cost compared to other sources. The study recommends that Saccos should have plans to pool finances together through savings and issue loans to their member at a cheaper rate. The Saccos management should also hire at least one financial expert to advice members on financial matters. Capital budgeting is a complex process and from the study most operators do not understand it. Some of the major areas that operators require advice is on the risk identification and analysis and how to incorporate it in the forecasting of cash flows. Another area is on the application of capital budgeting techniques in evaluating their projects.