FINANCIAL FLEXIBILITY AND FIRM SIZE: IMPACT ON THE FINANCIAL PERFORMANCE OF INDONESIAN SMES

Abstract

MSMEs are a strategic sector in the Indonesian economy, encompassing 99.9% of business units, absorbing 97.16% of the workforce, and contributing 59.08% to GDP. However, the financial performance of MSMEs, often measured by Return on Assets (ROA), remains a major challenge. Several previous studies have identified financial flexibility as a critical factor influencing financial performance. Financial flexibility, which reflects a company's ability to manage resources adaptively, is considered capable of improving financial performance. This study examines the effects of financial flexibility and firm size on the financial performance of Small and Medium Enterprises (SMEs) in Indonesia. The research focused on SMEs listed on the Indonesia Stock Exchange from 2020 to 2024. The research employed a quantitative approach using SEM-PLS to examine relationships among variables. Data were obtained from the annual financial reports of SMEs listed during the observation period. The analysis results indicate that financial flexibility and firm size have positive and significant effects on SME financial performance. This finding indicates that higher financial flexibility and greater total assets are associated with better financial performance. This research provides important implications for SME managers to strengthen financial structures and increase assets as a strategy to improve financial performance.