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A major feature of the development of Small and Medium Enterprises is the innovative organizational structure of a business which has been dealt with greater concern. It indicates the nature in which the work, resources and authority have been distributed in a well-organized and consistent manner, to achieve the comprehensive objectives of the business. This study intends to scrutinize the connection between innovative organizational structure and the performance of Small and Medium Enterprises in relation to Sri Lanka. It is clear that this subject has attracted extensive attention during the last few years as shown by the literature review on innovative organizational structures. It is common view that business environment needs organizations to implement innovative approaches to organize their activities to get advantage in the increasingly turbulent market place, as academics and practitioners appear to agree. Nevertheless, the connections between innovative structures and performance continue to be an area which is less studied. Likewise, the activities of major international companies in few business sectors have been considered for many studies of innovative structures. A sample of 383 Small and Medium Enterprise holders were used in this study for the data collection conducted using a structured survey questionnaire. The analysis contained descriptive and inferential statistics. The results indicated that hypotheses of the study tested with the significant, weak positive relationship between the innovative organizational structure and the performance of small and medium enterprises in Sri Lanka. Since, all dimensions were tested and results presented the same outcome, a qualitative component was applied in addition. The best relationship was found to be between Specialization and the Performance of SMEs. The conclusion of the study indicated that the innovation is the most powerful concept in the field of small business to win the competition and survive the future direction but it is still in the initial stage of practical application of Small and Medium Enterprises in Sri Lanka. .