The effect of financial literacy of owner-manager and firm performance of small and medium enterprises in Sri Lanka

Abstract

This study evaluates the impact of owner-managers financial literacy on firm performance in small and medium enterprises (SMEs) in Sri Lanka. It particularly seeks to answer whether owner-managers accounting literacy, debt management literacy, banking services literacy, and financial planning and budgeting literacy greatly influence SME firm performance. The quantitative research design was used by administering a structured questionnaire face-to-face to 250 respondents who were representing different SMEs in Sri Lanka. The measurement scales were subject to testing reliability and validation after guidelines in this area. The proposed hypotheses were tested using structural equation modelling (SEM) with 5000 bootstrap subsamples. The result indicates that financial planning and budgeting literacy, debt management literacy, and banking service literacy have statistically significant positive impacts on the firm performance of SMEs. However, while accounting literacy was hypothesized to influence firm performance positively, the statistical analysis did not support such an effect. The above results imply that (1) SME owners and managers need to concentrate their business on developing financial literacy in financial planning, budgeting, debt management, and banking services to optimize resource use and raise competitiveness. (2) It focuses on how the policymakers and regulatory institutions must develop interventions and programs to enhance financial education and training among SME stakeholders. (3) financial institutions and consultancy firms must design their products, services, and advice to address the dimensions of financial literacy that are most likely to lead to SME success.