How prepared are SMEs for market disturbances? A dynamic approach to SMEs’ financial resilience

Abstract

This study addresses a research gap in the conceptualization and measurement of financial resilience in small and medium enterprises (SMEs) by proposing and validating a dynamic capabilities-based approach for measuring SMEs’ financial resilience before, during, and after market disturbances. Research data were collected through an online survey of 256 SME entrepreneurs. An original research instrument was developed to measure SMEs’ dynamic financial resilience, providing a comprehensive assessment of key financial management capabilities and their enablers. The measurement is built on four key financial management capabilities relevant to SMEs: profitability, working capital management, asset management and financing. The summated scale was calculated to assess the level of SMEs’ dynamic financial resilience, and structural equation modelling was used to examine the direct and indirect effects of financial resilience enablers. The findings indicate that the sampled SMEs demonstrated above-average dynamic financial resilience. Resilience levels were higher in the proactive and reactive phases compared to the responsive-adaptive phase. Furthermore, the results confirmed that SMEs’ internal controls and entrepreneurs’ financial knowledge positively affect the overall dynamic financial resilience and its phases. The paper provides practical and policy insights to guide efforts to enhance SMEs’ financial resilience against future market disturbances.