The Influence of Capital Structure on the Financial Performance of Small and Medium Enterprises in Mitooma District, Uganda

Abstract

Small and medium enterprises (SMEs) are pivotal for a nation's economic growth, representing 90% of global businesses and generating 50% of job opportunities. In Uganda, this sector employs approximately 2.5 million individuals and contributes 18% to the GDP. Despite this significant impact, 45% of Ugandan SMEs face imminent collapse due to financial hurdles. Consequently, this study aimed to explore how capital structure influences the financial performance of SMEs in Mitooma District. The objectives were to scrutinize the impact of equity capital, debt capital, and retained earnings on SMEs' financial performance. Grounded in the Pecking Order Theory and Trade Theory, the study followed a quantitative research approach employing a descriptive research design. With a population of 836, a scientifically determined sample of 271 was selected through random and purposive sampling methods. Data collection involved a validated and reliable questionnaire. Using regression analysis through SPSS, the study found that the model provided a robust level of prediction (R=.678), explaining 45.9% (R2=.459) of the variability in SMEs' financial performance. Specifically, equity capital (t=-1.975, P=.045, P<.05), debt capital (t=7.015, P=.000, P<.05), and retained earnings (t=6.289, P=.000, P<.05) emerged as statistically significant factors. Conclusively, the study highlighted that equity capital, debt capital, and retained earnings significantly influence SMEs' financial performance. To enhance their financial standing, the recommendation is for SMEs to adopt innovative strategies. These findings hold relevance for policymakers, SME stakeholders, academic circles, and SME owners, offering valuable insights into bolstering this critical sector. Keywords: Small and medium Enterprises, Economic development, financial performance, Equity capital, Retained earnings.