Abstract:
This study investigates the impact of financial literacy on the performance of Small
and Medium Enterprises (SMEs) in Sri Lanka’s North Western Province. SMEs play
a vital role in economic growth, job creation and poverty reduction, yet many face a
high failure rate largely due to weak financial management and limited financial
literacy. Financial literacy which includes bookkeeping, budgeting, saving and debt
management is a critical determinant of SME success. Adopting a quantitative
research approach and a deductive reasoning framework, the study surveyed 200
SME owners and managers using a structured questionnaire. The instrument
measured the four dimensions of financial literacy namely bookkeeping literacy,
budgeting literacy, saving skills and debt management as independent variables, with
SME performance as the dependent variable. Data were analyzed using descriptive
statistics, Pearson correlation, and multiple regression analysis via SPSS. Results
indicate that all four financial literacy components significantly and positively
influence SME performance, with budgeting literacy and debt management showing
the strongest effects. For instance, regression analysis revealed that budgeting literacy
accounted for the largest variance in performance scores, underscoring its practical
importance. The findings highlight the novelty of this study by providing empirical
evidence from a regional Sri Lankan context, where limited research exists on SME
financial literacy. The study contributes to academic knowledge and policy by
emphasizing the need for targeted financial literacy training programs integrated into
SME development initiatives. Strengthening financial skills among SME owners can
enhance competitiveness, sustainability, and resilience in a challenging economic
environment.
