This study investigates the pivotal role of knowledge management (KM) in Serbian small- and medium-sized enterprises (SMEs), highlighting its impact on both the internal dynamics and external business performance of a company. Addressing the unique socio-economic and cultural context of the Serbian business environment, this research study explores how effectively KM practices can streamline business processes, enhance decision making, and foster more significant outputs. This study includes a sample of 370 companies, conducted during the period of the initial 6 months of 2023, by measuring the influence of knowledge management factors within the process of generating revenue and on decreasing operating costs. Drawing on previous theoretical research provided by different experts, followed by a quantitative analysis performed through principal component analysis (PCA), this study identifies critical factors of influence for KM adoption and exploitation in Serbian SMEs. This study offers insights into the interplay between knowledge acquisition, formation, application, warehousing, and knowledge transfer. Findings suggest that from an external perspective, the process capabilities of a company for acquiring and formatting knowledge have a positive influence on business performance, while the technological capabilities of a company for knowledge warehousing, sharing, and formatting produce the same effect but from an internal business perspective.