Financial Risk, Financial Risk Management Practices and Performance of Sri Lankan SMEs: Special Reference to Anuradhapura District

Abstract

All type of business organizations need to have careful monitoring of current expenses and forecast potential costs, which could be caused by risky actions. Risk is inherent in all business functions and in every kind of activities. This is especially true for Small and Medium sized Enterprises (SMEs) that are most exposed to the harmful effects of the risks, due to limited resources and structural features. Therefore, the objective of this study is to identify the relationship and impact of financial risk and quality of financial risk management towards performance of SMEs in Anuradhapura district. There are around 5000 registered SMEs in district which have been registered under divisional secretarial office and chamber of commerce branch. From them, 30 SMEs were selected by using purposive sampling method. Financial risk such as Capital Structure risk, Insolvency risk, and Liquidity risk and quality of financial risk management are the independent variables and performance of SMEs is the dependent variable. Data were collected from financial statements to calculate financial risk and some qualitative data were collected to measure quality of financial risk management through questionnaire. Collected data were analyzed by mean testing, correlation and regression analysis. The results reveal that there is no any significance relationship between financial risk and performance of the SMEs and there is a strong positive relationship between quality of financial risk and performance of the SMEs.

Keywords: Small and Medium size Enterprises, capital structure risk, insolvency risk, liquidity risk, profitability growth rate