Abstract

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.