Finance Structure and the Growth of Small and Medium Size Manufacturing Enterprises in Rwanda

Abstract

Finance structure is an increasingly important area of corporate finance for it shows the pattern of a firm’s total firm financing. Both theoretical and empirical research largely focuses on capital structure, which deals with long-term financing and ignored finance structure that encompasses both long-term and short-term sources of finance. The general objective of the study was to analyze the influence of Finance structure on the growth of small and medium manufacturing Enterprises in Rwanda. The study was guided by five specific objectives and these are; to evaluate the influence of debt finance structure, equity finance structure, firm size, retained earnings finance structure and trade credit finance structure on the growth of manufacturing SMEs in Rwanda. To achieve the objectives, the study used mixed research design for collecting, analyzing and integrating quantitative data. The target population of this study consisted of all the 868 small and medium manufacturing enterprises registered with Rwanda Development Board as of November 2017. To determine a study sample size of 273 firms, stratified random sampling techniques were used. Close-ended questionnaires were employed in data collection. The data collected was analyzed using Statistical Package for Social Science to generate descriptive statistics including percentages, frequency tables and mean scores. Multiple regression analysis was used to explore the relationship between retained earnings finance structure, Trade credit finance structure, equity finance structure, debt finance structure, firm size and the small and medium size manufacturing enterprises in Rwanda. Analysis of variance (ANOVA) was used to test the significance of the model. R2was used to measure the extent of the goodness fit of the regression model. The study findings showed that 42.8% of the variation in growth of small and medium manufacturing enterprises in Rwanda is explained by their financial structures which include equity finance, retained earning finance, debt finance, trade credit finance. The findings showed that retained earnings finance (β = 0.246, p=0.000), trade credit finance (β=0.082, p=0.047), debt finance (β= 0.237, p=0.000), and equity finance (β=0.110, p=0.014) had significant influence on growth of small and medium manufacturing enterprise in Rwanda. This study established that financial structure plays a critical role in expansion and growth of small and medium manufacturing enterprise in Rwanda. Among the recommendations, the management of the SMEs should be trained on the need to reinvest some of the profits into business to support growth. Governments, NGOs and Lending institutions must come together to create forum where small business is trained in cash and capital management. This will ensure that small and medium manufacturing enterprises retained some of their earning to finance growth. The management of the SMEs should further learn how to use account receivables and account payables to fully take advantage of trade credit finance structure. This will ensure the SMEs continue producing or manufacturing during time of low liquidity.