Financial Reporting of Relational Capital: Enhancing Transparency and Competitive Advantage in SMEs

Abstract

This paper examines the role of financial reporting of relational capital in enhancing transparency and competitive advantage in small and medium-sized enterprises (SMEs). Relational capital—the value embedded in relationships with customers, suppliers, partners, and other stakeholders—is a critical intangible asset for SMEs but remains poorly captured in traditional financial statements. Using a mixed-methods approach that combines a systematic literature review, conceptual framework development, and an empirical study based on survey and archival data from manufacturing and service SMEs, this study develops measurement propositions and testing strategies for reporting relational capital. Results indicate that improved disclosure of relational capital correlates with greater perceived transparency, higher investor and creditor confidence, and measurable improvements in competitive indicators (market share growth, customer retention, and margins). The paper proposes an integrated reporting model and practical guidance for SMEs and standard-setters, discusses implications for accounting practice and policy, and identifies avenues for future research. Keywords: relational capital; financial reporting; SMEs; transparency; competitive advantage; intangible assets.