Abstract
Small and Medium Scale Enterprises (SMEs) continue to be major players in the economic growth of Uganda as well as many of the emerging economies. The Uganda Investment Authority had projected 5.5% economic growth by 2030 in anticipation of stable market conditions necessary for the sustained financial performance of SMEs. However, the business failure rate of SMEs in Uganda had persistently revolved around 70% in 2018 from 50% in 2004. This problem had been linked to the turbulent market conditions characterized by intensive competition as well as volatile consumption behavior of the customers. Empirical literature indicates that competitive intensity, as well as volatile customer demand, presents a negative impact on financial performance. Hence, the study sought to determine the moderating effect of market conditions on the capital structure-financial performance relationship of SMEs in Uganda. From a population of 218,561 SMEs, a sample of 453 respondents was selected out of which, 423 responded to the questionnaire. Primary data were analyzed using descriptive statistics and multiple regression techniques. The hypothesis was tested at a 0.05 level of significance. Findings indicated that Market conditions had a positive and significant moderating effect on the capital structure-financial performance relationship (?= 0.175 and p = -0.027). We conclude that market conditions can strengthen/ weaken the effect of capital structure on the financial performance of SMEs. We recommend that SMEs should evaluate the market conditions during the process of deciding the financing mix for their operations to optimize the impact of capital structure on financial performance
Highlights
The relevance of capital to business startup and survival has gained prominence in the recent past because of the fluctuations in performance due to unpredictable business environment (Drover, Busenitz, Matusik, Townsend, Anglin & Dushnitsky, 2017)
The study set out to test the hypothesis that market conditions do not have a significant moderating effect in the relationship between capital structure and financial performance of Small and Medium Scale Enterprises (SMEs) in the Buganda region of Uganda
The study findings demonstrated that market conditions have a positive and significant moderation effect in the relationship between capital structure and the financial performance of SMEs
Summary
The relevance of capital to business startup and survival has gained prominence in the recent past because of the fluctuations in performance due to unpredictable business environment (Drover, Busenitz, Matusik, Townsend, Anglin & Dushnitsky, 2017). Other studies indicate that equity capital finances the initial costs operationalize the noncurrent assets and facilitates firms in acquisitions and mergers thereby enhancing firm growth as well as financial performance (Akeem, Terer, Kiyanjui & Kayode, 2014; Yapa Abeywardhana, 2016). A poorly thought-out capital structure could lead to a reduction in firm value thereby frustrating the strategic expectations of the shareholders. Managers strive to obtain close to an optimal capital structure to maximize the value of the firm. Whereas the optimal capital structure for firms has not been established empirically (Cekrezi, 2013), finance theory indicates that managers must seek a financing mix that optimizes the expectations of the firm's key stakeholders. The achievement of the strategic objectives of the key stakeholders of the firm is dependent on the quality of the financing mix decisions managers make
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