Innovation for Sustainable SMEs: How Financial Health Drives Resilience and Long-Term Performance in a Transition Economy

Abstract

Small- and medium-sized enterprises (SMEs) are central to sustainable development in transition economies, yet their financial fragility often limits resilience and the capacity to invest in innovation and responsible practices. Despite growing interest in SME, financial health and its role in sustainability, empirical evidence from small transition economies like Montenegro remains scarce, particularly on how liquidity and profitability dynamics underpin conditions for SDG-aligned growth. This study addresses this gap by analyzing how core financial indicators—cash position, capital structure, and working capital efficiency—affect liquidity and profitability among 345 Montenegrin SMEs across manufacturing, services, and trade. Using OLS and robust regression models, results reveal that a higher cash-to-revenue ratio and moderate leverage significantly enhance both short-term solvency and profitability, while working capital efficiency shows nuanced effects and sector-specific patterns emerge in capital-intensive industries. These findings highlight financial management as a foundation for SME resilience, creating financial preconditions for innovation and digital investments in aligned with SDGs (goals 8, 9, 12). Policy recommendations focus on improving finance access and financial literacy to foster innovation-driven, sustainable SME models aligned with the 2030 Agenda.