The CFE Model of SME Financial Performance: Does Financial Literacy Really Matter?
Keywords:
financial literacy, financial management practices, entrepreneurial orientation, adequacy, capital SME financial performanceAbstract
Small and medium enterprises (SMEs) are the backbone of emerging economies, yet their financial performance remains constrained by low financial literacy, limited capital, and weak managerial orientation. Prior studies show inconsistent findings on the direct impact of financial literacy on SME performance, suggesting the presence of mediating and moderating mechanisms that warrant systematic exploration. This study develops and tests the CFE model—Capital Adequacy, Financial Management Practices, and Entrepreneurial Orientation—to explain SME financial performance in Indonesia. Drawing on 110 SMEs in West Nusa Tenggara, data were collected through structured questionnaires in September 2025 and analyzed using structural equation modeling with Smart PLS 3.0. The results reveal that financial literacy has no direct effect on financial performance but exerts a significant indirect effect through dual mediation. Financial management practices emerge as the strongest mediator, while entrepreneurial orientation partially mediates the relationship. Contrary to expectations on previous studies, capital adequacy does not moderate the relationship but acts as a significant antecedent directly influencing financial performance. The model explains 44.2% of the variance in SME financial performance. These findings highlight that financial knowledge alone is insufficient; it must be consistently implemented through sound financial management practices to yield performance gains. The study contributes theoretically by integrating the Resource-Based View with Behavioral Theory and practically by offering policy implications that call for holistic SME development programs combining financial literacy training, practical mentoring, and entrepreneurial mindset enhancement.
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