Financial Management Practices and Performance of Small and Medium Enterprises in Sri Lanka

Abstract

This research was conducted to recognize the relationship between financial management practices and performances of Small and Medium Enterprises (SMEs) in Sri Lanka. In order to support the findings of the research, the reasons for not using financial management practices by SMEs have been discovered in this study. The primary objective of this study is to identify the relationship between financial management practices and performance of SMEs in Sri Lanka. As the sample of the study eight SMEs have been selected in Colombo district. The sample was selected based on the convenience sampling method. Under the financial management practices, this study has considered financial audit, accounting information system, investment decision and working capital management. Primary data required for the study obtained through distributing questionnaire and conducting interviews with the owner managers of SMEs. Secondary data collected for the study by examining the financial statements and annual reports of the SMEs. In order to analyse the data and present the findings, Statistical Package for Social Science (SPSS) software has been used. Findings of the study states that, there is a positive relationship between financial management practices and performance of SMEs in Sri Lanka. All four concepts used in the study which are financial audit, investment decisions, accounting information system and working capital management positively influence the financial performance of the firm. Further the study has found reasons which limit the SMEs from using financial management practices and they are financial instability of the SMEs, lack of knowledge regarding accounting and financial practices and owners are not interested to undertake financial management practices since it is not a mandatory requirement by the law of the state to carry out financial management practices when operating the business. By considering the research findings, the researcher concludes that, financial management practices such as financial audit, investment decision, accounting information system and working capital management enhance the financial performance of SMEs in Sri Lanka