Impact of Financial Management Practices on the Profitability of Small and Medium Enterprises (SMEs)

Abstract

Small and Medium Enterprises (SMEs) are an important part of the country's economic activities which play significant contribution to the output, employment and export but their profitability and survival are closely related with the quality of the financial management practices that they adopted. This paper analyzes the effect of financial management practices such as working capital management, capital structure decisions, financial planning and record keeping practices on profitability of SMEs using secondary data collected from the Ministry of Micro, Small and Medium Enterprises using trend and comparative analysis of seven secondary datasets and four supporting charts, and analyzes the growth of registered SMEs, the contribution of the SMEs to gross value added and exports, the growth of institutional credit extended to the SMEs, the trend of non-performing assets for SMEs loans and illustrative indicators of the relationship between financial management practices adoption and profitability outcomes are analyzed. The results indicate that the SME sector grew significantly in size and formalisation during the study period, while the gross non-performing asset ratio (NPA) of SME advances declined, suggesting the financial management and credit discipline of the SME sector has improved. The findings also show that SMEs that use more structured financial management practices, such as formal budgeting, working capital planning and systematic record keeping, report meaningfully higher profitability than those that use informal or ad hoc financial management practices. Finally, the study suggests that enhancing the financial management capability, especially in working capital management, financial planning and record keeping, is one of the most direct, actionable leverages to be undertaken by SMEs and policymakers for enhancing the sectoral profitability and financial resilience.