Impact of Financial Literacy on Firm Performance of SMEs in Sri Lanka: Mediating Role of Enterprise Risk Management

Abstract

Small and medium enterprises (SMEs) can be recognized as a main role player in a country’s economy. This study mainly focuses on identifying a few factors that could lead to identifying a viable business strategy for SMEs in Colombo District, Sri Lanka. As a developing country, Sri Lanka needs to have lucrative business potential and sustainability of the business. It has been identified that financial literacy (FL) plays a crucial role in enhancing business performance, and enterprise risk management (ERM) is considered to be another important factor in the betterment of business performance. Therefore, in this deep study, it was mainly hypothesized that higher FL leads to the high performance of SMEs in Sri Lanka. Same time, ERM was formed to mediate the relationship between FL and SME performance. FL found three constructs which are Financial Knowledge (FK), Financial Behavior (FB) and Financial Attitude (FA), and ERM following the same decomposed into three constructs, namely Identification of Risk (IR), Facing Uncertainties (FU) and Risk Reaction (RR). Results confirmed that there is a positive and direct relationship between FL and SME performance and ERM has a mediate relationship between FL and SME performance.