SMEs play a pivotal role in the sustainable development of any economy. Take the example of Japan, where 3.5 million SMEs account for 99.7 per cent of the total number of companies in Japan – reflecting the importance of SMEs in one of the largest and efficient economy of the world (SME Support Japan). Similarly, in case of the USA, small businesses account for 98 per cent of all identified US exporters and support nearly 4 million jobs (Office of the United States Trade Representative).
In Nepal, Industrial Enterprises Act, 2076 classifies the industries based on the amount of fixed capital investment instead of various other parameters such as revenue, production capacity, number of employment generation, exports etc. Hence, there is no credible basis to assess the contribution of SMEs in the economy. Still, the data of Ministry of Finance hints that SMEs contribute around 22 per cent of the Gross Domestic Product generating around 1.7 million jobs (Kharel & Dahal, 2020).
Importance of SMEs in Economic Development:
A piece of article published in the Financial Express has mentioned that MSME and SMEs account for 95 per cent of the enterprises, more than one third to half of the employment, more than one third to half of the national incomes, and one third to three fourth of the total exports (Subrahmanay, 2021).
According to WTO, SMEs represent over 90 per cent of the business population, 60 – 70 per cent of employment, and 55 per cent of GDP in developed countries. SMEs account for almost 99 per cent of entire business enterprises and are the employer to nearly 70 per cent of the employment for the OECD countries. Big firms are more vulnerable to abroad business cycles than SMEs are. Large companies which account for a country’s major portion of the economy, when, production halted due to abrupt decline in demand for even one commodity might lead to serious outcomes to the economy as depicted by the case of the “Nokia” company in Finland.
Likewise, SMEs are idol for preserving and cultivating traditional cultures, handicrafts, artifacts etc. For a country like Nepal – which has rich and diversified culture – it is imperative to promote SMEs with an aim to generate more employment, and for the sustainable development of the country. The geographical location and the diversity also support the need and growth of SMEs.
It has been evident that the SMEs plays a pivotal role and contributes more than large industries in the GDP and employment of both developing and developed countries. It relies more on local inputs and resources that the pandemic situations such as created by the COVID – 19 would hamper less than that of the large scale industries which relies on cross border resources and operational mechanism.
Likewise, SMEs are idol for preserving and cultivating traditional cultures, handicrafts, artifacts etc. For a country like Nepal – which has rich and diversified culture – it is imperative to promote SMEs with an aim to generate more employment, and for the sustainable development of the country. The geographical location and the diversity also support the need and growth of SMEs.
Problems in SMEs:
Not only in Nepal, but throughout the globe, SMEs have to face hardship in various aspects; some of the major problems that SMEs are currently facing globally are:
· Big proportions of SMEs lack proper accounting records due to being operated in the informal sector. It leads to the information asymmetry problem, and thus leads to the improper business analysis and forecasting (United Nations Conference on Trade and Development (UNCTAD), 2016).
· An analysis in Austria showed that the number one cause of bankruptcy was linked to the various internal issues rather than external factors (UN Conference on Trade and Development (UNCTAD), 2016).
· SMEs can’t have access to capital markets due to lack of adequate information that are required to be provided to the investors. Hence, the only way of obtaining finance by SMEs is the banks and financial institutions, and other informal ways (Hutadjulu & Blesia, 2016).
· Most SMEs are operated by the owners themselves and due to lack of adequate knowledge of book keeping and accounting has led to the lack of records to justify their business transactions.
· If lenders have the transparent and relevant information before them, they could be in the position to assess the business and risks associated with them properly while lending the sum – which is not possible in case of SMEs presently.
· There is a significance relationship between the quality of the financial statements and the access to the finance (United Nations Conference on Trade and Development (UNCTAD), 2016).
Further, audit of the books of accounts in Nepalese context is governed by various statues for various purposes. Such as, Audit Act, 2075 governs the audit of the central, state and local governments, and corporations wholly owned by the governments. Similarly, Companies Act, 2063 states that companies shall get their books of accounts audited. Also, Income Tax Act, 2058 mandates the audit of books of accounts is necessary for the entities having turnover exceeding NPR. 10 Million. Hence, no consolidated statue is there to govern the audit of all types of entities resulting in the exemption of audit to various types of entities.
Audit of books of accounts enhances the quality and reliability of the financial statements prepared by the business entities. It will enhance the quality of credit lending by the banks and financial institutions to the SMEs – thus, reducing the problems of mis – utilization of the facilities extended. Present policy of the Government of Nepal i.e. hap – hazardous lending of subsidized credit will not aid in the real growth of SMEs rather it has given rise to the mis – utilization of the credit facilities extended. In addition to the subsidized lending, SMEs need financial literacy, accounting and taxation knowledge, and cheaper professional accounting services.
Recommendation:
· Professional accountants possess requisite knowledge and expertise to maintain proper records and accounts, and prepare financial statements; thus, The Institute of Chartered Accountants of Nepal must encourage its members to provide professional services to SMEs at a lower fee (Ezeagba, 2017).
· Banks and FIs should formulate a unit consisting of professional accountants to assist and educate the clients in maintaining books of accounts and preparing financial statements.
· Ministry of Finance should set up a unit comprising of professional accountants who can be hired by the SMEs in assisting them in the maintenance of accounting records and preparing financial statements.
· Disclosure requirements shall be reduced in order to make the service of professional accountants cost effective and less cumbersome to the SMEs.
· The format of financial statements must be simplified for the SMEs; it is better if the NFRS could be revised and made simplified for the SMEs.
· Last but not least, the level of awareness in respect of the need and importance of the record keeping shall be imparted to the small business owners. Since, ultimately it rests upon the business owners to implement whatever measures government or other bodies formulates for enhancing the quality of financial statements.
Conclusion:
It is only when SMEs are strengthened the economy of the country would flourish. Hence, it is imperative that the adequate attention is given for the development of SMEs for the sustainable economic growth, generation of employment, and to make the economy pandemic proof as compared to the large multinational industries. A strategic and long term plan should be formulated at the policy level by the government along with the effort of private sector as well to achieve the desired level of growth of SMEs and overall economy. Most of all, the quality of financial reporting must be kept in priority by all of the stakeholder so as to increase the trust of the lenders as well as other regulatory bodies over the transparency of the business transactions of the SMEs.
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