The Role of SMEs in the Economy: Analyzing the Financial Performance of Algerian SMEs

Small and medium-sized enterprises (SMEs) represent a major pillar of the Algerian economy, accounting for 99.9% of businesses and employing over 3.3 million people. Despite their importance, these enterprises face complex challenges that affect their financial performance, measured by indicators such as return on assets (ROA). The study explores this performance's internal and external determinants, focusing on factors such as liquidity, debt levels, company size, and macroeconomic variables like GDP growth and inflation. Using the panel data method, we analyzed a sample of 40 SMEs over a five-year period (2018 to 2022). The results show that excessive liquidity, while seemingly prudent, has a negative effect on SME performance, as it limits investment opportunities. Similarly, short-term and long-term debt are associated with reduced profitability, contradicting some economic theories that view debt as a sign of good management. The limited access to credit often forces Algerian SMEs to rely on short-term financing, increasing their financial risks. In contrast, economic growth positively affects SME performance by boosting demand for their products and services. However, inflation has a negative effect, eroding profit margins due to rising operating costs. Thus, improving a company's performance is possible if the entity can create the conditions necessary for its survival and deploy the resources and logistics needed to achieve the desired objectives while aligning strategies across various activities to effectively implement its management policies. These research findings provide valuable insights for business leaders and policymakers, emphasizing the need for tailored strategies to maximize the financial performance of SMEs by considering these various factors.