Abstract
The study aims to find out the impact of financial management practices (FMPs) on performance of Small and medium enterprises (SMEs) in Sri Lanka from the lens of the Legitimacy Theory. Primary data was collected from the SME owners/managers. Self-administered questionnaires were issued to collect data. The sample was selected through stratified simple random sampling method from the registered SMEs. Data were analyzed and evaluated by using Descriptive Statistics, Independent sample t-test, Correlation analysis and regression analysis. The results revealed that Accounting Information System, Financial reporting and analysis has moderate level adoption, Working capital management has high level adoption and Financial planning and control has low level of adoption in SMEs. Further, Financial reporting and analysis and Working capital management is significantly impact on the performance of SMEs. Accounting Information system and financial planning and control is not significantly impact on performance of SMEs. The findings revealed that there is a significant difference in the application of FMPs among small sized enterprises and medium sized enterprises. FMPs are highly applied by medium sized enterprises than small sized enterprises. The study also found out that lack of accounting knowledge and cost of hiring professional accountants are the major challenges faced by SMEs to adopt the FMPs. Eventually, this study recommends to SME owners to adopt FMPs (at a higher level) and government and other regulatory bodies to create suitable policies and standards to mitigate the challenges. SMEs practice important FMPs to obtain the society's impression as social responsible organizations (in terms of legitimacy within ‘social contract’). Accordingly, application of FMPs aims to legitimise company behaviour by ensuring the profitability, survival and growth to influence the society’s perceptions about the SMEs by way of higher number of employments, use of domestic raw materials and payment of taxes. This study contributes to the theory by bringing in SMEs perspectives in to the Legitimacy theory. Further, it contributes to practice and literature by carrying new insights on the impact of FMPs on performance of SMEs in the Sri Lankan context.
Highlights
The Small and Medium Enterprise (SME)sector is the backbone of all developed and developing nations
Tharindi & Rathnayaka’s (2016) study based on Financial Management Practices of SMEs in Sri Lanka found that that there is a positive relationship between accounting information system and financial performance of SMEs
It is fair to say that there is a significant difference between small sized Enterprises and medium sized enterprises in applying financial management practices in terms of Accounting Information System, Financial reporting and analysis, Working capital management and financial planning and control
Summary
Sector is the backbone of all developed and developing nations. Development in Sri Lanka (2016), the SME sector plays a vital role in the socio economic aspects of a country and is considered as the backbone of an economy and it is estimated that the SMEs accounts for over 90% of the total enterprises, 45% of the total employment and make a significant contribution to the Gross Domestic Product. SMEs contribute a large part of Sri Lanka’s economy, accounting for 80% of all businesses. These are found in all primary, secondary and tertiary economy and provide employment for the persons of different skilled, semi-skilled and unskilled (Wickramatilake, 2018). Even though SME role is considered as substantial in the economy, many SMEs are troubled by management problems such as human resource management, financial management, operations management, marketing management and strategic management, etc. (Hashim &Wafa, 2002).
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