Capital Structure Importance in SME Profitability: Lucky Generals

This dissertation explores the significance of capital structure in enhancing the profitability and performance of small and medium enterprises (SMEs), focusing on Lucky Generals as a case study. It begins by defining capital structure as a mix of debt and equity, crucial for financial decision-making and business operations. The research identifies the challenges SMEs face in determining optimal funding sources and highlights the importance of effective capital structure in maximizing organizational wealth. Through a literature review, it examines determinants of capital structure, its role in improving profit and performance, and the obstacles in implementation. The research employs both primary and secondary data collection methods, including questionnaires, to analyze the impact of capital structure on Lucky Generals. The findings contribute to understanding financial strategies for SMEs, offering insights for financial experts and organizations seeking to optimize their capital structure for long-term financial viability and productivity; Desklib provides access to similar past papers and solved assignments.

Dissertation
(To analyse the importance of capital
structure in increasing the profitability and
performance of small and medium
enterprise)

Table of Contents
INTRODUCTION...........................................................................................................................4
Overview of the topic.............................................................................................................4
Significance of the topic.........................................................................................................4
Research problem...................................................................................................................5
Research aim..........................................................................................................................5
Research objectives................................................................................................................5
Research questions.................................................................................................................6
Research rationale..................................................................................................................6
Structure of the dissertation....................................................................................................6
LITERATURE REVIEW................................................................................................................9
What is the concept of capital structure and small and medium enterprise in the context of
organisation?...........................................................................................................................9
What are the various determinants of capital structure used by Lucky generals in increasing
the profitability and performance?.......................................................................................11
What is the importance of effective capital structure in enhancing the profit and improving the
performance of Lucky generals?..........................................................................................13
The challenges faced by Lucky generals in implementing the effective capital structure for
their organisation..................................................................................................................15
RESEARCH METHODOLOGY...................................................................................................18
DATA ANALYSIS AND FINDING............................................................................................25
Frequency distribution tables...............................................................................................25
Data presentation and interpretation.....................................................................................27
DISCUSSION................................................................................................................................38
CONCLUSION..............................................................................................................................43
RECOMMENDATION.................................................................................................................44
REFERENCES..............................................................................................................................46
APPENDIX....................................................................................................................................50
Questionnaire........................................................................................................................50

INTRODUCTION
Overview of the topic
Capital structure of an organisation is considered as the mixture of two types of capital
structure such as debt and equity. This capital structure is used by the organisation in order to
manage financial decision of the organisation so that business issues can be managed. This is
essential for the organisation that to keep effective capital structure by keeping balance on its
elements so that wise finance decisions can be taken and at the same time efficient business
operations can be executed. Appropriate capital structure helps the organisation to analyse their
financial position and to examine accurate profitability so that overall wealth of the organisation
can be maximised (Hirdinis, 2019). Capital structure is referred as the proportion of money
which is invested by the organisation in different dimensions and when they are collaborated it
creates overall capital of the organisation. The current research report is related with examine the
importance of capital structure in increasing profitability and performance of small and medium
sized organisation. For small organisation their capital is needed to be managed in such a manner
that they can arrange all of their business activities. The report also highlights the challenges
which are being faced by the small and medium sized organisation while implementing effective
structure of capital in their organisation (Siqueira and et. al., 2018). The organisation taken for
the current dissertation is Lucky Generals which is associated with creating advertisement
campaign for their customers. The company is considered within small and medium sized
business sector and currently operating their business in London, UK.
Significance of the topic
The current topic is related with giving higher importance to the small and medium sized
businesses as they can get to know regarding importance of keeping efficient capital structure so
that to increase overall profitability and organisational productivity. With the help of effective
capital structure, the organisation may get to know regarding utilisation of their funds. On the
other hand, this research report is providing significant and in-depth information related with the
manner in which capital structure of the organisation can be used in order to optimise
productivity and profitability (Kao, Hodgkinson and Jaafar, 2018). The information within the
current research is of high use for financial experts as they can take various decisions for their
organisation which would be beneficial for the organisation during long term in context of

financial viability and productivity. The gathered information of the research will also help
various organisation about how they can design and develop a well structure capital for their
company. The present topic is also eye caching for those small and medium enterprise who are
struggling for the fund. With this investigation they can know what all factor is used to
determine their sources through which they can raise fund for their business operation. Thus, the
existing research topic is very much significant for the small and medium enterprises within the
UK.
Research problem
The main research problem which is identified in the present research is that small and medium
enterprises faced is deciding the right source through which they can raise fund. Due to
ineffective capital structure small and medium enterprise cannot able to raise their capital in
accurate manner. This create problem as their business operation cannot be done in appropriate
manner this affect their profit margin in large way. Having the right source to acquire capital is
very necessary as through which organisation are able to run their business function and provide
product or service to the market. This research will help them to mitigate this problem by
identifying the sources as well as overcoming the challenges faced by them while developing a
good capital structure for their company.
Research aim
To analyse the importance of capital structure in increasing the profitability and
performance of small and medium enterprise: “A study on Lucky Generals”.
Research objectives
 To understand the concept of capital structure and small and medium enterprise in the
context of organisation.
 To identify various determinants of capital structure used by Lucky generals in increasing
the profitability and performance
 To analyses the importance of effective capital structure in enhancing the profit and
improving the performance of Lucky generals
 To discern challenges faced by Lucky generals in implementing the effective capital
structure for their organisation.

Research questions
 What is the concept of capital structure and small and medium enterprise in the context of
organisation?
 What are the various determinants of capital structure used by Lucky generals in
increasing the profitability and performance?
 What is the importance of effective capital structure in enhancing the profit and
improving the performance of Lucky generals?
 What are the challenges faced by Lucky generals in implementing the effective capital
structure for their organisation?
Research rationale
The major rationale behind selection of this topic is related with gaining in-depth
information related with the topic of capital structure and its importance within small and
medium sized organisation in terms of developing profitability and performance. The current
research is related with developing knowledge of finance aspect so that using such information
Small and medium sized organisation may take advantageous decisions (Andrieu, Staglianò and
Van Der Zwan, 2018). This research also highlights the various challenges which would be
faced by the organisation while deciding the effective capital structure for their company. The
research is aimed at meeting dual perspective of the researcher such as professional and personal.
In the context of personal perspective, the research would develop different skill of researcher
such as interpersonal skills, financial reporting skills, management skills, problem solving skills
and many others. These skills will aid in completing the total dissertation in systematic manner
and with more accuracy. Besides this in the context of professional perspective the research will
develop differential skills within researcher so that in their professional career the same can be
used and career embellishment can be acquired. The various financial skill will help them when
they will be working in an organisation as a manger and using this to decide the best and
appropriate capital structure for their company. Thus, the current research is quite significant in
attaining the dual objective in effective and efficient manner.
Structure of the dissertation
Having the right structure for the dissertation is important as it tells the reader about the way
research is being completed and what all activities are being covered for completing the

investigation in systematic manner. In the current dissertation five major chapter will be included
which are demonstrated as under:
Chapter 1: Introduction: This is the first chapter within the current dissertation in which brief
information related with research topic is mentioned. Under this chapter the research problem is
also identified for which research is conducted and at the same time rationale of the research is
also mentioned. This chapter is important as in this section the aim and objective of the
investigation is included on the basis of which the overall project is being carried out.
Chapter 2: Literature review: Under this section information from different articles and books
are added so that secondary information can be added within the research and at the same time
investigation can be supported by pre-existing information over the research topic. This section
helps the investigator to gain more knowledge on the selected topic in order to conduct
investigation in sound manner. Literature review address the research question so that
investigator can attain their aim and objective as per their choice and thoughts.
Chapter 3: Research methodology: This chapter consists of using different methods so that
study can be exerted within systematic manner. This part in the dissertation will helps the
researcher to extract and accumulate important data so that aim and objective can be achieved.
This is one of the crucial part of the research in which researcher selects such methods which are
beneficial for collecting information related with research topic. In the current research, primary
and secondary data collection methods are used so that to gather information related with the
topic in apt manner. Under the dissertation random sampling method is chosen so that
quantitative methods can be adopted and research results can be acquired.
Chapter 4: Data analysis and discussion: Under this section gathered information are analysed
using different methods so that appropriate demonstrate results of the research topic. This
chapter is essential in making significant results into the research. In this research uses the data
analytical tool so that beneficiary data as per the research need can be acquired. This section then
shows the analysed data in proper format and presentation so that readers can acquires all the
useful data.
Chapter 5: Conclusion and recommendation: Under this chapter summary of the report is
mentioned so that appropriate findings can be exerted within research. This chapter holds high
degree of importance within research as this is helpful in execution of planned aspects as well.
Conclusion and recommendation chapter is very important for the researcher to write this part in

appropriate manner because this catches the eyes of the reader about the research topic in proper
way.

LITERATURE REVIEW
What is the concept of capital structure and small and medium enterprise in the context of
organisation?
According to the view of Ahmed and Afza (2019), capital structure refers to a specific
combination of equity and debt which is used by an organisation in order to finance its overall
growth and operations. Debt involves borrowed money that which has been taken from the
lender in order to pay back including interest amount. Equity described the rights of the company
without the requirement in order to pay back any further investment. The debt to equity ratio
helps in analysing the risk of the borrowing practices of an organisation. Capital refers to the
most important and crucial factor for starting a business in better manner. The two primary
capital sources for an organisation is Debt and Equity. In order to start a business, a owner invest
their own money or they takes loans from the lender and/or and other financial institution in
order to pay back with interest. There are many types of sources from where an organisation can
easily raise their funds such as equity shares, preference shares, long-term loans, retained
earnings and more. These funds plays an important role in order to operate their business in
effective manner. Capital structure is important for an organisation in order to determine the
overall stability of their business in better manner. The capital structure of an organisation is
divided in two categories which includes equity capital and debt capital. Equity capital refers to
the money which is owned by the owners or shareholders of an organisation. There are two types
of equity capital in capital structure that are retained earnings and contributed capital. Retained
earnings describes the part of profit which has been keep aside in order to help in strengthening
their business. On the other hand, contributed capital described those money which is invested by
the owner while opening their business or the amount which is received from shareholders as a
price for the ownership of an organisation. Debt capital is described as borrowed amount which
is used in operating a business. It is available in different form such as long-term bonds as well
as short term commercial paper. Long term bonds are considered as safest debts as its repayment
period can be expended and only interest amount is required to be repaid while the principal
amount is requires to be paid at the time of maturity. Short term commercial paper is a kind of
short term debt instruments which is used by the companies in order to help in raising the capital
for a shorter period. The organisation whose capital structure is sound which has higher chance

in order to increase the market price of their shares and securities in effective manner. This
makes higher valuation within the market. A good capital structure of an organisation ensures
them that their available funds are used in effective and efficient manner. It also prevents them
from under and over capitalisation in the organisation.
As per the perspective of Raharjo (2018), small and medium sized enterprises are the
businesses that maintain their assets, revenues or a number of workers below a particular
threshold. Every nation has their own meaning of what comprise a small and medium sized
enterprise. In UK the company whose turnover is less that or equal to €10 million as well as less
than 50 employees are considered as small enterprise. On the other hand, the enterprise whose
turnover is less than or equal to €50 million as well as less than 250 employees in order to
operate their functions are considered as medium size business. Small and medium enterprises
plays an crucial role in the economy as it employs large number of people as well as helps in
shaping innovation in the organisation. These are responsible in order to provide employment to
most of the people so, avial their daily needs in effective manner. This makes government of
every country in order to offer certain incentives which includes favourable tax treatment as well
as better access to loans to help small and medium sized business of their country. Many
innovations and technological processes that are attributed through medium and small size
enterprises. SMEs are focus on launching new products and service in the market in order to
become successful in effective. This makes them capable in adapt the changing requirement of
the market in effective and faster way. Capital structure of small and medium enterprise are the
combination of debt and equity amount which is required in order to fund their assets and
operations. Capital structure of small and medium enterprise are smaller than the larger
organisation because their operations are smaller and take low amount. The ideal capital
structure of an enterprise is depend on their specific situation which includes factors like the
business cycle, the cost of capital as well as any existing debt or equity. Small and medium sized
companies involves less number of labour, less capital investment as well as fewer machines in
order to operate their business. The owners of the company are not capable to invest their own
money so they take loan in order to operate their business. There are many types loans programs
are available for the small and medium sized enterprises that are not availed by the large
enterprise. These loans provide help to the companies in order to increase their business capital
to operate their business in better manner. The SMEs helps in providing employment to the more

people which helps in improving the growth of the country due to which government helps them
in order to generate more fund and operate their business in better manner. This will helps
companies in order to operate their business in better manner as well as achieve their goals in
effective manner. This refers to the most effective source that help company in order to raise
their capital and operate their business in better manner. This makes their capital structure
effective in order to increase their growth in the market in better manner.
What are the various determinants of capital structure used by Lucky generals in increasing the
profitability and performance?
In the opinion of Abbadi (2021), capital structure is a term or financial plan or financial
structure of an organisation which describe as composition of the long term funds' sources. The
leverage is a term which describes as proportion of various long term sources of funds to the
total capitalisation of the company. When the extra or marginal cost of each source of an
organisation's long term financing is the same then their capital structure is considered as sound
or optimal. Every organisations are eager in order to analyse their optimal capital structure. The
optimal capital structure of the company is described as their debt are 50% and equity are also
50%. At this level the combined average cost of their capital is minimum which helps them to
operate their business in better manner. There are numerous of determinants related to capital
structure that helps Lucky generals in order to increase their profitability and performance in
better manner. Some of them are described below:
Trading on Equity or financial leverage- Financial leverage is described as use of long
term fixed interest bearing debt, preference share capital and equity share capital. When the
assets of the company is financed by the debt yield a return more than the debt cost then the
earning per share of the company is increase and the owner's investment remain the same. And if
the preference share capital is used in order to acquire assets then the earnings per share is also
increase. In case of debt, the impact of the leverage is felt more in the company because their
cost of debt is lower than the cost of preference share capital as well as the interest they paid on
their debt which is a deductive charge from profit in order to calculate the taxable income while
the preference share dividend is zero (Muharam, 2021). This refers to the most important
determinants of capital structure that help Lucky generals in order to increase their business
profitability and performance.

Growth and Stability of sales- The growth and stability of sales of an organisation
influenced their capital structure in effective manner. When the sales of an organisation are
expected to remain stable, then they can effectively increase their high level of debt. The stability
of the sales ensures that the Lucky generals will not face any problems in order to meet their
fixed commitments of repayment of debt with their interest amount. The rate of their sales
growth will affects their capital structure decision in which they need to decide from where they
need to raise their funds in order to increase their profitability and performance.
Cost of Capital- Every amount that is invested in an organisation has a cost. Cost of
capital is described as the minimum return which is expected by their suppliers. The expected
return of the suppliers is depend of the risk which is assumed by the investors. The shareholders
of an organisation assumed high level of more risk than the debt holders (Kaur and Kaur, 2021).
The rate of dividend for the shareholders is not fixed as well as boards of directors does not have
any legal obligations in order to pay dividends even if the company made profit or not in the
particular financial year. This makes company in order to provide large number of dividend
when their organisation earn profit. This makes Lucky general in order to determine the cost of
capital that help company in order to know from where they can raise their capital for improving
their business's performance and profitability.
Risk- There are two kinds of risk which are required to be considered while planning for
the capital structure of a business which includes financial risk and business risk. Business risk
described as variability to earnings before paying interest and taxes. This risks are can be caused
internal and external. Due to improper mix of products, non-availability of raw material, absence
of strategic management, incompetence to face competition and many more the internal risk is
caused. The internal risk of the company is associated with the efficiency of the company in
order to conduct their operations within the broader environment (Glazyrin, 2021). When the
operation condition of the company is change then it cause external business risk. The Lucky
general of the company need to analyse their risk in order to address them effectively and operate
their business in better manner and increase their probability and performance.
Cash flow- The conversation is the one of the feature of a sound capital structure. It does
not means that employing a small amount of debt or employing no debt in the organisation. It is
basically related to the assessment of fixed charges liability which is created by the use of
preference capital or debt in the capital structure of an organisation. This makes them able in