<p>This study examines the role of free cash flow (FCF) in shaping the performance of Indonesian small and medium enterprises (SMEs) by distinguishing between external market perception and internal operational outcomes. While FCF is commonly viewed as a signal of financial flexibility, its effectiveness in SMEs may depend critically on governance quality. Addressing this gap, the study investigates whether corporate governance moderates the relationship between FCF and firm performance and whether such effects vary across sectors. Using panel data from 42 publicly listed Indonesian SMEs over the period 2019–2023, the analysis applies a robust lagged (t–1) moderated regression framework with year and industry fixed effects to control for endogeneity and unobserved heterogeneity. Firm performance is measured using Tobin’s Q to capture market perception and EBITDA to reflect operational reality. The results show that FCF has no significant direct effect on either performance measure, highlighting the importance of governance mechanisms. Board independence significantly strengthens the relationship between FCF and market valuation, particularly in the service sector, indicating its critical signalling role. In contrast, the cost of debt negatively moderates the relationship between FCF and operational performance in the manufacturing sector, suggesting a financial distress effect rather than a disciplinary role of debt. Family ownership does not exhibit a significant moderating effect. Overall, the findings demonstrate that the impact of FCF on SME performance is contingent on governance quality and sectoral context, offering important insights for governance design and financial management in emerging markets.</p>