The Impact of Financial Management Practices on Business Performance of Small and Medium Enterprises in Northern Province

Abstract

This study aims to find out the Financial Management Practices (FMP: maintaining accounting records, financial reporting preparation and analysis, accounting information systems, working capital management, investment decisions, and financing) among Small and Medium Enterprises (SMEs) and also investigate the impact of those practices on their business performance in the Northern Province of Sri Lanka, which is registered under divisional secretarial divisions using stratified proportionate random sampling techniques with a structural model. This study adopts the modern financial management theory of equity and pecking order and finds that financial management practices have a significant (positive) impact on the business performance of SMEs, excluding investment decisions at 61 percent. Finally, the research recommends that proper FMP in SMEs, even with the maximum effort, shows success in performance better than others. This means that SMEs should be established with well-organized practices that force related authorities to monitor the financial management system on a regular basis. Donors should provide capacity-building training and transfer funds in accordance with the development of SMEs in the said region