The financial performance of MSEs is a major concern for Uganda with high solvency rate. Financial literacy has been identified as one of key competencies required for the success of these MSEs. However, its effect on the financial performance of MSEs hasn’t been fully established by existing literature thus the need for further research. Basing on gist of Resource Based Theory, the study sought to examine how financial literacy affect financial performance of MSEs in Mbarara city in Uganda. A cross sectional survey design was deployed where 285 registered MSEs were sampled from a population of 1100 registered MSEs .Financial literacy variables considered were book keeping, debt management and Budgeting and financial performance was measured by revenue growth, market growth and profit growth. Data was collected using a questionnaire and some extracted from reports and financial statements from these enterprises. Data corrected was statistically analysed and correlation and multiple regression were run to establish the effect and the relationship between the study variables. With the models developed, the study established that financial literacy significantly affects financial performance of MSEs. The study further concluded that financially literate MSEs perform better than financially illiterate ones and recommended that government and development partners should extend financial literacy training programs through workshops to MSEs aiming at instituting skills and knowledge for improved financial performance.

Keywords: Micro and Small Enterprises (MSEs), Financial Performance, Financial Literacy