Analyzing financial risks in small and medium enterprises: evidence from the food processing firms in selected cities in Ghana

Abstract

PurposeThe purpose of the paper was to analyze the financial risk perception of owners/managers and to link such perception to the performance of their ventures.Design/methodology/approachThe paper employed PLS-SEM to analyze financial risks and its impact on SMEs in the food processing sector. Financial risks data on the operational, market, technological, credit and liquidity risks and financial performance including compliance, social and resource efficiency performance were collected from 214 food processors in selected cities in Ghana. Higher-order constructs were employed in assessing the relationship between financial risks and SME performance.FindingsFinancial risk spurs a firm's financial performance. Increased financial risks cause firms to be resource-efficient and compliant. Furthermore, an assessment of how the various performance indicators interplay showed increased compliant improved social performance and vice versa.Research limitations/implicationsThe paper looked at food processing firms in three major cities, analyzing the financial risks of the businesses and their effect on their performance. Although, these cities have the largest number of these firms, generalizing the findings from the study should be done taking into consideration the scope of the study.Practical implicationsThe study exposes owners/managers to the critical issues of financial risk, its components and how this could impact on their operations. It expected that owner/managers in the food processing sector would craft the necessary risk mitigating strategies to deal with the different financial risks they face. For theoretical implication, the paper suggests the need to highlight the risk exposure of firms due to the business–stakeholder interactions as contained in the stakeholder theory.Originality/valueThe paper employed the higher-order construct of PLS-SEM to analyze the financial risks of food processors. The originality of the paper lies with the methods used.