Information Management and Business Review (ISSN 2220-3796) Vol. 9, No. 1, pp. 23-30, February 2017 23 Impact of Financial Management Practices on SMEs Profitability with Moderating Role of Agency Cost Saqib Muneer, * Rao Abrar Ahmad, Azhar Ali Government College University Faisalabad, Pakistan saqibmuneer85@gmail.com, * abrar_rao008@yahoo.com, rana.azharali11@gmail.com Abstract: The importance of Small and medium enterprises (SMEs) towards economic development and growth is considerable. Some SMEs are facing difficulties to their development due to the lack of financial resources and management experience. The objective of this study is to check the relationships of financial management practices on profitability of small and medium enterprises and also to check the impact of agency cost on this relationship. This study consists of data analysis of two hundred SMEs from Faisalabad Pakistan. The study used primary data predominantly. SPSS 23 is used for descriptive analysis and Structural Equation Model (SEM) through Partial Least Square (PLS) 3 for hypothesis testing. The findings of this study indicate the presence of positive relationship between financial management practices and SMEs profitability but agency cost as a moderator has no effect on this relationship. The study strongly recommends higher adherence to financial management practices. Policy makers, developments partners, owners, and managers of SMEs may use these findings for sustainability of their business in Pakistan. Keywords: Financial management practices, Agency cost, SMEs, Working Capital 1. Introduction Small and medium enterprises (SMEs) have significant contribution toward creating employment and also toward the economic development and growth (International Labor Organization, 2013, p. 1; Ratten, 2014; ulHaq, Usman, Hussain, and Anjum, 2014; Karadag, 2015). In Japan, small and medium industries have marked dominance, constituting about 99 % of corporations (The Information Dissemination and Policy Promotion Division of Japan’s Patent Office, 2009). In South Africa, SMEs contribute about 91 % of formal business and provide 61 % employment opportunities and enhance the GDP of South Africa between 52 to 57 % (Abor & Quartey, 2010). In low income countries like Pakistan, the scale of the businesses size is limited to micro to medium. The main question is that how small and medium businesses measure their performance (Ahmad & Harif, Hoe, 2013, p. 87; Benedict & Matsotso, 2014, p. 247) said that failure of SMEs is inappropriate scale of measurement of the performance. The measurement of business is better through financial performance (Gallani, Krishnan & Kajiwara, 2015, p. 6). 1). Effective use of finance much emphasized by modern research (Gitman, 2011). This scholarly effort will help to identify the financial management practices effect on the profitability of SMEs and also identify the agency cost effect. Good corporate governance is necessary for improving the performance and profitability of businesses (Braga-Alves & Shastri, 2011; Price, Rountree & Roman, 2011). In developing countries attention has been given to governance of the firm but still firms are suffering the governance problem (Ekanaakey, Perera & Perera, 2010). Actually corporate governance are rules under which the relationship of manager and owner is over looked and it is make sure that the manager is working for best interest of the owner. The contribution of this study is that financial management practices of SMEs are to improve its financial performance and review the cost that has to bear to the owner of the firm for maintaining the fair behavior of the financial manager in the best interest of the firm. SMEs are a key source of economic growth (Sadi & Henderson, 2010), whether in developed or developing countries. In Saudi Arabia SMEs represent more than 90% of enterprises providing 51% of jobs in private sector and 22% of GDP (Mohammed, 2015 b). Importance of SMEs is now widely recognized as playing a vital role in creating new jobs (OECD, 2006; Karadag, 2015). Pakistan is also a developing country and the importance of SMEs can’t be ig nored. Although Importance of these entities considerable but a high failure rate has found there, which led researchers to question the management practices of these entities (Fatoki, 2014, p. 922)? In Pakistan SMEs are not providing required results although when compared with other developing countries because in Pakistan SMEs are facing many problems. From the major problem lack of financial management practices also include. This study is conducted in Faisalabad city so that financial management practices adopted by SMEs and the impact of these practices on firm performance can be viewed. For this study Faisalabad is selected