Effect of capital budgeting practices and financial performance of youth owned businesses in Kisumu Central sub-county

Abstract

Capital budgeting techniques are essential tools for financial decision-making, particularly in assessing the viability of long-term investments. These techniques provide a systematic approach to evaluating the expected return on investment (ROI), weighing risks, and establishing the potential financial impact of new projects or expansions. The success and growth of youth-owned enterprises are crucial for the economic development of Kisumu Central Sub-County, Kenya. However, these enterprises often face significant challenges in making informed investment decisions due to a lack of understanding and application of capital budgeting techniques. The Payback Period (PBP), Net Present Value (NPV), and Internal Rate of Return (IRR) are widely recognized as essential tools for evaluating the feasibility and profitability of investment projects, yet their utilization by youth-owned enterprises in the region remains limited.The main purpose of this study was to establish the effect of capital budgeting on financial performance of youth own businesses in Kisumu. Specifically, the study sought to identify the budgeting techniques used by the youth, to determine the factors influencing the choice of capital budgeting technique and to establish the effect of capital budgeting on financial performance of youth enterprises in Kisumu central-sub county. The study was anchored on the theory of Economic value added and pecking order theory and adopted correlational survey design. The reliability of research instrument was established by use of Cronbach’s alpha coefficient while validity was tested using experts in finance. Piloting of the research instrument was done on 64 respondents and the results of the final study were no included in the main findings. The study targeted 246 firms out of which 192 responses were obtained accounting for 78.05% response rate. Primary data was collected by use of questionnaire and analysed through both descriptive and inferential statistics.The results showed that the unstandardized coefficients for payback period (PBP), net present value(NPV) and internal rate of return(IRR) were 0.196,0.194 and 0.258 respectively. This implies that a unit percentage change in PBP,NPV and IRR results in the firms’ financial performance by 0.196%,0.194% and 0.258% respectively. The significant unstandardized coefficients implied that PBP,NPV and IRR are positive and significant predictors of the financial performance of the youth owned businesses in Kisumu central sub county. Similarly, it was established that capital budgeting practices altogether can explain variance of financial performance of youth owned business enterprise by 58.4%. The study provides evidence-based recommendations for policymakers on how to promote effective capital budgeting practices in the economy.