Guided by the theory of dynamic capabilities and the knowledge-based view of an organization, the purpose of this paper is to examine the crucial role played by entrepreneurial orientation and absorptive capacity in the relationship between strategic flexibility and firm performance, with a specific focus on small firms. Design/methodology/ approach: The study uses survey data collected from owners of 272 small businesses in India and follows the linear regression method to establish the link between strategic flexibility and firm performance. It hypothesizes that the strategic flexibility of a small firm impacts entrepreneurial orientation, and subsequently its performance, while absorptive capacity further enhances this relationship. Findings: The conclusions drawn from the study provide empirical evidence on the mediating role of entrepreneurial orientation in the relationship between strategic flexibility and firm performance. The findings also point out that the potential absorptive capacity of a firm strengthens the relationship between its strategic flexibility and entrepreneurial orientation. Research limitations /implications: The empirical findings of the study are limited to small firms from the automotive service industry. Practical implications: The study contributes to the existing knowledge on managerial practice by pointing out the importance of strategic flexibility as a dynamic capability and illustrating its impact in the case of a small firm’s performance. Originality/value: As yet, there is a dearth of empirical evidence derived from large samples of small firms. The study supplements available literature on dynamic capabilities and knowledge management.