The purpose of this study was to examine the mediating effect of innovation in the relationship between knowledge management and business performance of SMEs in Rwanda. A cross-sectional survey and quantitative methodological approach were used to collect data used to carry out mediation test. The study results revealed that innovation had a positive effect on business performance. However, there was no direct effect of knowledge management on business performance, except through the full mediation of innovation. This implies that without innovation, Rwandan SMEs may not achieve an improved business performance. This study contributes to existing body of knowledge management on the improvement of business performance of SMEs through innovation. The results could help business owners to make use of the available knowledge resources by transforming them into new products, new processes and new markets to boost their business performance. This study used a cross sectional research design and was limited to investigate the effect of knowledge management and innovation on business performance. Future researchers could employ a longitudinal method to investigate any possibility for variations in the results. Qualitative studies could equally be used to supplement the quantitative findings. Lastly, this study focused on manufacturing SMEs only. Future research might focus on other types of businesses.