Abstract:
This study examines the impact of internal control systems on the financial
performance of small and medium-sized enterprises in the North Western Province
of Sri Lanka. SMEs are vital to regional economic development, yet many face
challenges related to financial inefficiency, limited expertise, and weak internal
governance. The research evaluates five core components of internal control systems:
control environment, risk assessment, control activities, information and
communication systems, and monitoring, analyzing their impact on key financial
performance indicators. Using a quantitative approach, structured questionnaires
were distributed to 170 SME owners and managers. Data analysis employed
descriptive statistics, correlation analysis, and multiple regression techniques. The
results demonstrate that all internal control framework components have a positive
and significant impact on financial performance. Monitoring provides the strongest
contribution, while risk assessment shows the least influence among the variables
studied. These findings emphasize the importance of robust internal controls for
improving financial outcomes in SMEs. The study emphasizes the importance of
SMEs prioritizing strategic implementation and continuous evaluation of control
practices to improve their financial performance. This research provides empirical
insights for policymakers, financial advisors, and stakeholders, contributing to
improved governance practices within the SME sector in Sri Lanka.
