Financial management practices and financial performance of small and medium-size enterprises in Sri Lanka: special reference to Uva province

Abstract

Financial management is a crucial factor that determine the financial performance. The small and medium-sized enterprises (SMEs) are small in nature therefore, it faces challenges to adopt proper financial management practices to enhance the profitability. This study investigates how financial management practices influence the financial performance of SMEs in Uva Province, Sri Lanka. The study explores critical dimensions of financial management such as working capital management, financial reporting and analysis, accounting information systems, investment appraisal, and financing. A sample of 500 SMEs was selected and data were gathered using a self-administered questionnaire. Descriptive statistics, Pearson correlation, and multiple regression analysis were utilized to examine the data, with Cronbach's Alpha confirming the reliability of the measurement instruments. The results reveal significant positive correlations between effective financial management practices and the financial performance of SMEs. Specifically, improvements in Working Capital Management, Financial Reporting, Accounting Information Systems, Investment Appraisal, and Financing are linked to better financial outcomes. The regression analysis indicates that these practices collectively exert a substantial influence on financial performance, with the model exhibiting a strong predictive fit. These findings highlight the vital role of effective financial management in improving SME performance and success.