Thesis:

Influence of financial structure on financial performance of small and medium enterprises in Kisii central sub-county

The choice of financial structure and financial management has a greater effect on the financial performance of most firms in the world and in particular Kenya. While most firms try to find a solution to balancing both, financial structure choice and its impact on financial performance remains a greater dilemma to all small and medium enterprises in Kisii County. The study sought to investigate the influence of financial structure on financial performance of Small and Medium Enterprises in Kisii Central Sub-county, Kisii County. The study findings will be helpful to scholars, and policy makers and investors to make sound judgment when determining the financial structure to work with, for better financial performances. Findings from the study will be also be informative to researchers who may be interested in carrying out further studies on the relationship between financial structure and financial performance of small and medium enterprises. Pecking Order Theory, Agency Cost Theory and the Modigliani-Miller Theories were used in the study to provide explanations on the phenomena under study. This was a descriptive survey and questionnaires will be used in collecting data from the respondents. Random sampling was used as the general sampling technique with the aid of the Yamane’s formula to select 109 SMEs to participate in the study from a target population of 150 SMEs in Kisii Central Sub-County. Statistical package for social sciences (SPSS version 23) was used to analyze both qualitative and quantitative data that was collected during the study. The study has indicated that a good number of respondents understands the concepts of equity capital and prefers it as a source of finance as it is not redeemable and it is permanent source of finance. The owner controls the business and enjoys profits whenever it’s high and bears the risk alone. It does not entail any charge. This therefore shows equity capital forms higher proportion of financial structure hence has a significant effect on financial performance of SMEs. Debt capital has a negative effect on the performance of SMEs due to its fixed interest that must be paid where the firm makes profit or not. The study concludes that, firms with good asset base attracts lending financial institutions hence boosting their performance as they are able to face challenges that are in business cycles. From the study retaining earnings was well appreciated irrespective of not having a significant effect on financial performance due to challenges of raising it. It stands a chance of being the best source of finance for expansion because it is the cheapest and painless method of raising additional capital. The study recommendations to various stakeholders which include management, lending institutions, government and researchers. Management of SMEs should ensure that the financial structure of the firm is always at optimum. The firm cannot only survive on equity capital due to its low risk, also cannot wholly depend on debts due to high risk, more so retained earnings is only realized after making profit.