Relationship between capital structure and financial performance of top 100 small and medium enterprises in Nairobi county

Abstract

Small and Medium Enterprises (SMEs) use different sources of financing. Some of them emerging to be a challenge to the performance of the SME since most SME owners’ lack necessary knowledge on which sources of finance enhances financial performance. Despite SMEs using different sources of financing some of them are still not growing and others are collapsing, majority of SME owners do not have ideas on how debts and internal sources of finance influences their financial performance. Therefore, this study aimed at establishing the relationship between capital structure and financial performance of top 100 small and medium enterprises in Nairobi County. Capital structure employed by firms could be a reason influencing their financial performance trends an issue that has not been given serious attention. It is on this basis that the researcher was propelled to investigate the contribution of capital structure on small and medium firms’ financial performance. The study targeted 100 SMEs which are registered as companies in Nairobi County. Simple random sampling was applied for choosing the samples size. The sample size selected under proportional allocation was 30. Secondary data was collected from financial records of SMEs. Documentary guide aided in data collection. Descriptive statistics such as mean and standard deviation and inferential statistic such as Pearson correlation and multiple regression model was used in analyzing data. The findings revealed that capital structure had negative relationship on firm financial performance of SMEs in Nairobi County. The study showed that small and medium enterprises in Nairobi County used both debt and equity in their capital structure although debt was predominant. There is evidence that capital structure has a positive significant effect on ROA. From the findings, firm’s with more liquid stock is highly likely to meet its financial obligations in the required time and higher liquidity is as a result of proper organization of internal sources and debts. The study affirms that capital structure has a significant effect on financial performance. From the study findings there is enough prove that capital structure enables SMEs to engage in financial investments. The results of study on the relationship between capital structure and performance of SMEs are contradictory which justifies further research.