Abstract:
The financial performance of SMEs is a major concern for Uganda with high rates of solvency among these enterprises. Financial literacy has been identified as a one of the key competencies required for the establishing, management and thriving of SMEs. However, the exact effect they have on the financial performance of SMEs hasn’t been fully established by the available literature thus the need for further research in this area. Therefore, basing on the logic of Resource Based Theory, the study sought to examine the effect of financial literacy on financial performance of small and medium enterprises in Mbale city where it was guided by three objectives that include to analyse the effect of debt management literacy on the financial performance, to assess the effect of budgeting literacy on the financial performance of Small and Medium enterprises and to examine the effect of book keeping literacy on the financial performance of Small and Medium enterprises. The researcher deployed across sectional survey design where a sample of 52 SMEs was selected using simple random sampling technique.
Responses were collected using an open ended questionnaire. Data collected was analysed using SPSS version 2020 where correlation and regression analysis was performed to establish the effect between the variables. The study established that debt management literacy, budgeting literacy and book keeping literacy significantly and statistically affect and predict financial performance of SMEs. The study recommends that government and other development partners should institute financial literacy training programs and therefore employ people with necessary knowledge to run their operation. The study further suggests that further research on other dimensions of financial literacy like savings, accountability, and investment so as to make a generalization of effect of financial literacy on the Financial performance of SMEs.
