Effect of Financial Literacy on Firm Performance of Small and Medium Enterprises in Sri Lanka

Abstract

The purpose of this study is to investigate the effect of financial literacy on the performance of Small and Medium Enterprises (SMEs) in Sri Lanka. The study assesses the financial literacy of SME owners in Sri Lanka and analyzes the relationship between financial literacy and firm performance of those SMEs as a measure of business economic performance. A questionnaire survey was administered among 378 respondents Island wide. The study analyzed the SME owners' financial literacy namely, financial behavior, financial influence, financial attitude and financial knowledge of their firm performance. Collected data were described by frequency, percentage and factor analysis and regression analysis. The results show that financial knowledge, financial influence, and financial behavior impact positively on their firm performance while financial attitudes do not reveal any statistically significant relationship with the performance of SMEs. It further, reveals that they are aware of the component of financial statements and they are more likely to follow their parents, parents' life experience and what they have learned on record keeping mostly for the better performance of their businesses. The findings will give practical implications for the government and other respective institutions and SME owners by highlighting the importance of facilitating SME owners’ adequate financial education with the expectation of improving their performance as business leaders in the country.