Why Small Manufacturing Firms Shun DCF

Abstract

Although there is ample literature on the use of capital budgeting techniques by small firms, there is practically no research available on why small firms don't use discounted cash flow methods. This paper looks at this rationale issue in die light of Brigham's 10 hypodieses (in Fundamentals of Financial Management, sixth edition). Support is found primarily for Brigham's ignorance hypothesis, but also for his other hypotheses concerning small firms' short-run cash flow orientation, the comparatively small size of their projects, the managers' overall knowledge of their firms, and the irrelevance of value analysis when the value of the firm itself is unknown. Furthermore, small firms seem quite satisfied with their present techniques. Since the chief difficulty of small firms is forecasting future cash flows, changing to more sophisticated techniques offers no obvious and effective remedy for that problem.