Effect of Financing Structure on the Profitability of Micro and Small Enterprises in Nakuru Central Business District

Abstract

Financing a business is among the steps towards achieving a firm’s objectives. The existing literature on financing structure and profitability of MSEs reveals contradicting results. Some studies established a positive effect of financing structure and profitability, others showed a negative result of financing structure on profitability. This study sought to assess the effect of financing structure on the profitability of micro and small enterprises in Nakuru central business district (CBD). Specific objectives were to: establish the effect of retained earnings on the profitability of micro and small enterprises, determine the effect of personal savings on the profitability of micro and small enterprises, examine the effect of debt capital on profitability of micro and small enterprises, and to establish the joined effect of retained earnings, personal savings and debt capital on profitability of micro and small enterprises. This study adopted descriptive survey research design. Target population was 1,249 MSEs located within the CBD. A sampling formula by Yamane (1967) was applied to arrive at a sample size of 302 MSEs. A systematic random sampling was used in picking of the respondents; every Kth MSEs became part of the response group. Structured questionnaire was used for collecting of primary data and frequency tables used for data presentation. Percentages, mean, and standard deviation were used to summarize variables under study while inferential statistics of correlation coefficient and regression were used to test hypothesis and explain the relationship between the variables under study. Z and F tests were used in hypothesis testing at 5% level of significance. Simple regression was applied in establishing the cause-effect of each of the independent variables to the dependent variable. Multiple regression was used to determine the joint cause-effect of the independent variables on the dependent variable. The study revealed that there is a statistically significant relationship between the financing structure and profitability of MSEs. Both retained earnings and personal savings have a significant positive effect on profitability at a 5% level of significance while debt capital has a significant negative effect on profitability at a 5% level of significance. The study concluded that the financing structure significantly affects the profitability of micro and small enterprises in Nakuru central business district. The study recommends that Micro and Small enterprises should continue using retained earnings and personal savings for purposes of increasing profitability before they opt for debt capital. In general, financing structure to be adopted by micro and small enterprises should be that which has a positive influence on profitability