Capital Structure And Financial Performance Of Small And Medium Enterprises In Embu County, Kenya

ABSTRACT

This study was to find out how capital structure affects financial performance of small and medium enterprises in Embu County. There has been an enormous development in Embu SME’s for the last four years. Notwithstanding the undebatable significance of cost of capital, it’s effect on financial performance is not always obvious for there is empirical evidence of a negative effect between financial performance and cost of capital. The definite intention of the study was to determine the effects of; equity capital, retained earnings and debt capital on financial performance of SMEs. To conduct the survey the researcher used the causal research design. All 95 registered SMEs in Embu County as at 31st December 2016 formed the target population. A sample of 29 (30%) was selected from the target population by use of stratified random sampling techniques. To enhance collection of primary data questionnaires were administered by use drop and pick up later technique to the sampled respondents. For a detailed examination of quantitative data Statistical Package for Social Sciences (SPSS version 20) data software was applied. Regression analysis was done and gave different results on the three independent variables (equity capital, debt capital and retained earnings). The study findings established that equity capital has a significant effect on financial performance of SMEs due to a p-value of 0.021. The study also indicated a p-value of 0.020 on debt capital hence a significant effect on financial performance of SMEs in Embu County. On retained earnings, the study found a p-value of 0.797 indicating a no significant effect on financial performance of SMEs in Embu County. Further study findings concludes that, taking all factors into account (equity capital, debt capital and retained earnings) constant at zero, financial performance of SMEs is 2.473. The study established that equity capital had greatest proportion in capital structure; this was enhanced by its advantages like owner enjoying profit alone and independence in management. On debt capital the study found, it’s a source of capital that can enhances financial performance of a business, however it’s very risky if not well managed. On retained earnings, the study found it has no significance effect on financial performance of SMEs due to difficulties of raise and maintaining it. The researcher suggests lending institutions should enhance their lending policies and develop tailormade programs that will see debt capital a less risky source of finance. The study concluded that a mix of sources of finance will enhance a sound financial performance.