Impact of Financial Literacy on the Performance of Small and Medium-Sized Enterprises: Special Reference to Colombo District

Abstract

The research explores how financial literacy levels influence various indicators of firm's performance, including profitability, growth, and sustainability, within the context of SMEs. The performance of the SME will be measured as an indicator of their business performance. The study analyzed the financial literacy of SME owner-managers, specifically focusing on their financial behavior and handling, financial knowledge, financial attitudes, and financial awareness of their firms’ performance. Therefore, a quantitative investigation based on "Prospect Theory" and Exchange Theory has been performed. To obtain the necessary data, a repre-sentative convenience sampling method was employed on a sample of 170 SMEs in the Colombo district. The study utilized primary data collected via a question-naire. Analysis were conducted using Structural Equation Modelling, alongside reliability and validity tests. The study showed a positive correlation between business performance and financial literacy. Independent variables like financial behavior, knowledge, attitudes, and awareness significantly impact SME perfor-mance. Financial literacy directly affects the performance of sustainable business-es, confirming that a strong understanding of finance improves company perfor-mance. Thus, increasing financial literacy is crucial for developing successful en-trepreneurial strategies. This study also concluded that business owners and staff ought to have greater levels of education. It should be encouraged knowledge sharing among employees and the hiring of more skilled workers, according to the exchange theory's rationale. Therefore, policymakers and business owners should set up training programmes to advance financial literacy.