THE EFFECTS OF EQUITY FINANCING ON FINANCIAL PERFORMANCE OF SMES IN UGANDA, A CASE OF SELECTED WHOLESALE BUSINESSES IN KAWEMPE DIVISION – International Journal of Research in Education Humanities and Commerce

THE EFFECTS OF EQUITY FINANCING ON FINANCIAL PERFORMANCE OF SMES IN UGANDA, A CASE OF SELECTED WHOLESALE BUSINESSES IN KAWEMPE DIVISION

Author: Kifanta Sanday

ABSTRACT

This study looked at the effect of equity financing on financial performance of SMEs in Uganda. Although equity financing is important in explaining the creation of SMEs, the extent to which equity financing affects the performance of SMEs is not well known. The study was guided by the following objectives, to examine the relationship between retained profits and the Return on Investment (ROI) of SMEs, to investigate the effect of Contributions from friends on return on assets (ROA) of SMEs and to examine the effect of Own Savings on the sales growth of SMEs. The research was carried out in Kampala district, Kawempe Division. Kampala was chosen because it is one of the regions with the highest concentration of businesses. The research adopted a descriptive survey design and targeted all small and medium enterprises in Kawempe division. Major focus was on accessible SMEs and the population was 70 registered SMEs in Kawempe Division. The sample was determined using simple random sampling. The study used primary data that was collected from the respondents using self-administered semi-structured open and close ended questionnaire. A five step likert scale was used for close ended questions. The collected data was refined, coded, and analyzed using STATA 12 and MS Excel to give more meaning to the findings of the study. The research findings indicated that 47% of the businesses were in the early stages of growth while 43% of the business units have exceeded the infancy stage of growth. The most preferred form of businesses in Kawempe Division was sole proprietorship. This could be highly attributed to the ease in legal requirement during formation, capital requirement and exercising full control of the business while least preferred form of business was limited company. From the study it was evident that equity finance had a positive relationship to financial performance of the SMEs. SMEs prefer equity of own savings. This is because the entrepreneurs prefer to own risks at the same time avoiding any undesirable change in ownership. This is because most of the businesses are sole proprietorship forms of businesses which are controlled and managed by the owners.

Keywords: equity financing, sole proprietorship, small and medium enterprises and financial performance.

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