Access to Finance: A Potent Force? Investigating Financial Literacy and Performance in Enterprises of Palembang City, South Sumatra, Indonesia

The significance of financial performance for the survival of SMEs is undeniable, as reflected in their contribution to the Gross Domestic Product (GDP). Effectively managing finances is crucial for ensuring the future sustainability of SMEs. This research aims to empirically demonstrate two key aspects. Firstly, it seeks to provide evidence of the direct influence of financial literacy on the financial performance of SMEs. Secondly, it explores the indirect influence of financial literacy on financial performance through the mediation of access to finance. A random sampling technique was employed to select 524 SMEs in Palembang City, South Sumatra, Indonesia, as the unit of analysis. Data collection, conducted through questionnaires, took place from May to July 2023. Structural Equation Modelling (SEM) was utilized for data analysis. The research findings indicate a significant positive effect of financial literacy on financial performance. Furthermore, access to finance was identified as playing a partial mediating role in the relationship between financial literacy and financial performance. The evidence of partial mediation suggests that SMEs stand to achieve higher financial performance when they can effectively determine efficient funding sources. This research contributes to the understanding of the intricate dynamics between financial literacy, access to finance, and SME financial performance, offering valuable insights for both academia and practitioners. The manager of SMEs can select appropriate external funding sources requires sound financial decision-making, which is influenced by financial literacy. Effective funding choices have an increasing impact on financial performance, which has growing sway.