Effects of capital budgets on cash flows: A case study of Kenya power and lighting company limited

Abstract

Capital budgeting decisions have a long term effect on the performance of a firm and can determine its success or failure. These decisions are influenced by the changes in the business environment. Kenya Power and Lighting Company Limited is involved in capital intensive projects that have impacted on its performance and cash flows. The purpose of this study was to examine the effect of capital budgets and how they affect cash flows at the Kenya Power and Lighting Company Limited. The objectives were to evaluate the effects of cash flow mismatch, foreign exchange, inflation and government intervention on cash flows. The study used explanatory research design. Data was collected from existing records. The findings were presented using a linear regression equation. The research finally concludes that cash flow mismatch, foreign exchange rates, inflation and government interventions affect cash flows at The Kenya power and Lighting Company Limited. The researcher recommends that the Company should aspire to match the inflows to outflows, thorough education of budget holders on the need to be committed to budgets and the adoption of zero based budgets for non-key projects, evaluation of projects to determine cost versus benefits and monitor project implementation schedule to ensure no budget over-runs. To minimize the effects of foreign exchange risk, the study recommends the use forward contracts and swaps. The study finally recommends that the company should constructively engage the government to undertake projects after taking into consideration their benefits to the public and financial viability to the company.