Determinants of capital structure of small and medium enterprises: a case of Katwe Metal Works and fabricators in Rubaga division, Kampala district.

Abstract

The study sought to establish the effect of the determinants of the capital structure of Small and Medium Enterprises (SMEs). The study adopted a cross sectional survey design from which a population of 228 SMEs from which a sample of 140 SMEs was drawn. A self-administered questionnaire was used to collect responses. Measurement of the relationships of the study were done and subjected to rigorous data processing and analysis using the relevant statistical computer software packages. Findings indicated that there were positive and significant relationships between profitability and capital structure; firm size and capital structure; growth on capital structure; and asset structure and capital structure of SMEs with growth having the highest relationship with capital structure. Results from regression analysis revealed that among all the study variables; profitability, growth, size and asset structure, growth was the strongest predictor of capital structure. Further, the findings revealed that the model could only explain 57 .7% in variance of capital structure. In conclusion, the findings revealed that all the business characteristics were significant predictors of capital structure. This is confirmation that profitability, growth, size and asset structure are key determinants of the capital structures of SMEs. The study recommends that SME owners or managers should develop strategies that foster capital structure with emphasis on the business determinants that were used by the researcher to study firm capital structure. Likewise, the management of SMEs should put a lot of attention on growth as a business determinant of\SMEs since it was the strongest predictor of capital structure. Similarly, in order to promote desirable capital structures, firm owners need to put in place effective internal controls that support firm capital structures.