Bridging the Gap: Financial Literacy, Business Experience, and Performance of Small and Medium Enterprises in Sri Lanka

This study investigates the impact of financial literacy and business experience on the performance of Small and Medium Enterprises (SMEs). Globalization and interconnectedness create a more complex financial landscape. Financial literacy becomes even more crucial for navigating this complexity and making informed decisions about a wider range of financial products and services. Financial literacy is hypothesized to directly influence firm performance, with business experience acting as a mediator in this relationship. To capture the diversity of SMEs in Sri Lanka, this study employed a stratified random sample of 677 businesses across all nine provinces and 25 districts in Sri Lanka. The survey instrument was designed to measure financial literacy, business experience, and firm performance. The study utilizes SmartPLS software to analyze data collected from SMEs.  Partial Least Squares (PLS) is a structural equation modeling (SEM) technique well-suited for analyzing complex relationships of this nature. Findings reveal a significant positive influence of financial literacy on both firm performance and business experience. Furthermore, business experience was found to partially mediate the relationship between financial literacy and firm performance. These findings highlight the critical role of financial literacy for SMEs, especially in the cosmopolitan era, where a complex financial landscape and globalized markets demand strong financial decision-making capabilities. The importance of fostering business experience is further emphasized, as it allows SMEs to leverage their financial literacy for enhanced performance in this dynamic environment.