The Effect of Financial Management Practices on Performance of SMEs in Sri Lanka

Abstract

Small and Medium Enterprises (SMEs) play an important role in every developing country contributing to the growth of the economy in many ways. The aim of this study is to identify the effect of financial management practices on performance of SMEs in Sri Lanka: Special Reference to North Central Province (NCP). Working capital management practices, Investment appraisal practices, Capital structure management practices, financial reporting & analysis practices and Accounting information system practices were identified as independent variables and Performance of SMEs was identified as the dependent variable of this study. All SMEs (nearly 2000 SMEs) operating in NCP during the year 2019 was identified as the population of this study. Out of that, 322 SMEs were selected as the sample based on disproportionate stratified random sampling method and final sample was 245 manufacturing, service and trade SMEs operating in NCP. Data was collected through a structured questionnaire distributed among SMEs functioning in NCP. Descriptive statistics and inferential statistics like Pearson correlation analysis and multiple regression analysis were used to analyze data using the SPSS package. Results of the study revealed that there is a positive effect of financial management practices on performance of SMEs. Among financial management practices, working capital management practices and capital structure management practices have a significant positive effect on SMEs performance.
 Keywords: Capital structure, Financial Management, Performance, Small and Medium Enterprises, Sri Lanka, Working capital.

Financial Management Practices and Innovative Performances of the Nigerian SMEs Sub-Sector: A Conceptual Approach

“…Working capital management and current assets are interwoven since current assets connote enterprise assets that are readily convertible to liquid assets within a short period of time, usually twelve calendar months, while working capital connotes the financial resources invested in current assets, thereby demonstrating the short-term financial health of an enterprise in the course of its day-to-day operations (Somathilake & Pathirawasam, 2020;Mohammed & Suleiman, 2022). In addition, it reinforces the act of ensuring an optimal balance between the current assets and liabilities of a business through prudent strategies, and its management practises are essential for covering the management of accounts payable and receivable, cash, as well as inventories (Makori & Jagongo, 2014).…”

“…This essentially connotes capital budgeting activities that generally affect the financial standing of an enterprise, notably the assets, since it reflects the long-term investment commitments of a business enterprise, which are usually large (Graham et al, 2014) cited by Somathilake and Pathirawasam (2020). According to Agbude (2013) and Kwarbai et al (2020), it requires taking cognizance of potential investments, probing investment opportunities, making decisions among competitive options, and consequently monitoring to satisfy shareholder's interests.…”

“…According to Agbude (2013) and Kwarbai et al (2020), it requires taking cognizance of potential investments, probing investment opportunities, making decisions among competitive options, and consequently monitoring to satisfy shareholder's interests. Financial resources committed in the outlay of an enterprise with the goal of expectable returns are known as investments (Somathilake & Pathirawasam, 2020). The payback period method and internal rate of return are some of the most widely adopted metrics for investment appraisal, and it's established in the literature that these practises are critical to strategic decision making as a lot of success factors are dependent on them (Ejoh et al, 2016;Wambua & Koori, 2018).…”

“…The collection of information, mechanisms, and tools that dependably articulate and address difficulties that impend the performance outcome of enterprises is an act of financial information system (Al-Dalaien & Khan, 2018). A lot of business needs are reliant on accounting information embedded in a financial information system (Somathilake & Pathirawasam, 2020). Such systems incorporate accounting documents that are resourceful for peculiar business needs.…”

“…On the other hand, an internal source may be feasible through reinvestment of retained profits in the cause of operations (Graham et al, 2014). Thus, the act of effectively and efficiently managing these sources of finances to realise the financial objectives of an enterprise is known as capital structure management (Somathilake & Pathirawasam, 2020).…”