Relationship between Financial Literacy and Business Performance: Empirical evidence from small and medium enterprises (SME) in Sri Lanka

Abstract

The purpose of this study was to determine the level of financial literacy in Sri Lanka
based on demographic factors and to identify the impact of financial literacy on the
business performance of small and medium enterprises (SMEs). As a result, a
quantitative study based on Prospect Theory and Exchange Theory was conducted. In
Sri Lanka, there is a shortage of studies on these variables. This research is being
carried out in order to close the empirical gap. The sample size was 100 SMEs in Sri
Lanka, and the required data was collected using the usual purposive sampling method.
After conducting factor analysis, reliability, and validity tests, this study used primary
data from questionnaires. Since the previous empirical review suggested using this
analysis to examine the relationship, the objectives were achieved through descriptive analysis, correlation, and regression analysis. The study's findings revealed that financial literacy and business performance have a positive relationship. As a result, independent variables such as technical financial knowledge, financial market knowledge, and financial management skills impact SMEs' business performance, with technical financial knowledge and financial management skills being the most influential of these variables. This study concluded that good financial knowledge among owners is required to make decisions to explain prospect theory. This study also found that owners and employees should have a higher level of education. According to the exchange theory, it should exchange information or knowledge among employees and recruit more skilled employees. The study gives SMEs and policymakers insight into how financial literacy can help them make better decisions and improve their businesses performance. As a result, business owners and policymakers should set up training programs to improve financial literacy knowledge.
Keywords: Financial Literacy, SME’s, BusinessSME’s Performance