A quick guide to financial education for MSMEs in Nepal

Financial statements are crucial tools for monitoring the health of your business. Here are the primary financial statements every MSME should understand:

a. Balance Sheet

The balance sheet provides a snapshot of your company’s assets, liabilities, and equity at a specific point in time. It is divided into two main sections: a) Assets and b) Liabilities + Equity

1. Assets: What your business owns [e.g. cash, inventory (stocks), property, vehicle, land, plant and machinery; receivables].
2. Liabilities: What your business owes (e.g., loans, creditors).
3. Equity: The value of the owner’s investment in the business.

b. Profit & Loss Statement (Income Statement)

This statement shows the profitability of your business over a specific period (monthly, quarterly, or annually). It includes:

1. Revenue: Total sales or income earned.
2. Expenses: Costs incurred to operate the business.
3. Net Profit or Loss: The difference between revenue and expenses.

c. Cash Flow Statement

This statement tracks the movement of cash in and out of your business. It helps ensure that the business has enough cash to meet its obligations.

The cash flow statement is broken into three sections:

1. Operating Activities: Cash from day-to-day business operations.
2. Investing Activities: Cash flows from buying or selling assets.
3. Financing Activities: Cash from loans, capital contributions or repaying debts.

Effective budgeting and cash flow management are vital for the survival of an MSME. Below are some strategies to manage finances better:

a. Create a Detailed Budget

1. Revenue forecasting: Estimate your future sales based on historical data, market trends and seasonal factors.
2. Expense planning: Categorize and plan your fixed costs (e.g., rent, salaries) and variable costs (e.g., materials, marketing).
3. Contingency fund: Set aside a small portion of your earnings for unexpected costs.

b. Monitor Cash Flow

1. Track Receivables: Ensure customers pay on time to maintain healthy cash flow.
2. Manage Payables: Pay suppliers on time to maintain good relationships but avoid paying too early unless there’s a discount.
3. Optimize Inventory: Avoid overstocking or understocking inventory to improve cash flow efficiency.

c. Use financial software or apps

There are various affordable accounting software and apps available in Nepal, such as Tally, QuickBooks, or Zoho Books, which can help MSMEs track their finances in real time.

One of the most significant challenges for MSMEs in Nepal is access to finance. Below are some key sources of financing:

• Bank Loans

Traditional bank loans are often a primary source of capital, but MSMEs often face challenges like high-interest rates and strict lending criteria. Ensure that you have a clear business plan and financial statements to present to lenders.

• Government and development bank programs

The Nepal Rastra Bank and various government agencies offer specific loan schemes for MSMEs, such as subsidized loans and grants for businesses in rural areas or specific sectors.

• Microfinance Institutions

Many MSMEs in rural areas rely on microfinance institutions, which offer small loans to businesses with limited access to traditional banking services.

• Private equities and venture capitalists

For high-growth businesses, seeking equity funding from private equities or venture capitalists might be an option. This requires a solid business plan and growth potential. Find a list of PE firms in Nepal here.

• Crowdfunding

MSMEs can also raise funds through online crowdfunding platforms. While less common in Nepal, global platforms like Kickstarter or Indiegogo can provide exposure to international investors.

Understanding tax obligations is crucial to avoid legal issues and penalties. MSMEs must comply with the tax laws of Nepal, including:

a. Income Tax

Businesses with an annual turnover exceeding NPR 5 million must register for income tax. For smaller businesses, there are simplified tax schemes available.

b. Value Added Tax (VAT)

VAT is applicable to businesses whose turnover exceeds NPR 5 million per year. Understanding VAT filing and compliance is essential for MSMEs to avoid penalties.

c. Employee-related Taxes

MSMEs need to comply with employee-related taxes, including social security contributions, which are mandatory for businesses with more than 10 employees.

d. Tax Filing

Maintain accurate records of income and expenses to simplify tax filing. Consider consulting with a local tax advisor to ensure compliance and optimize your tax liabilities.

To remain competitive and profitable, MSMEs must focus on controlling costs and improving their profit margins.

a. Identify Fixed and Variable Costs

Fixed costs remain the same regardless of your business activity (e.g., rent, salaries).

Variable costs fluctuate with production or sales volume (e.g., raw materials, shipping).

b. Negotiate with Suppliers

Negotiate better terms with suppliers or explore alternative suppliers to reduce costs.

c. Improve Operational Efficiency

Streamline operations, reduce waste, and implement technology to lower production costs and improve efficiency.

d. Pricing Strategy

Analyze your competitors’ pricing and ensure that your prices reflect the value you offer. Don’t underprice your products, as it can lead to unsustainable profit margins.

Building financial literacy among MSME owners and employees is essential for business growth.

a. Training and Workshops

Attend financial literacy workshops or training sessions organized by the government, banks, or non-governmental organizations (NGOs) to enhance your understanding of financial management. The Nepal Chamber of Commerce and other trade associations often host training programs for MSME owners.

b. Engage Professional Accountants

While hiring a professional accountant may incur a cost, it will ultimately save time and money by ensuring accurate bookkeeping, tax filing, and financial strategy.

Every business faces risks, and managing them properly can safeguard your MSME from unexpected losses.

a. Types of Insurance

1. Business Liability Insurance: Protects against lawsuits or claims.
2. Property Insurance: Covers damage to your business property.
3. Employee Health Insurance: Helps protect the well-being of your staff.

b. Risk Diversification

Avoid putting all resources into one product or market. Diversifying your offerings and customer base can protect your business from unforeseen market shifts.

To scale successfully, MSMEs need to focus on:

1. Reinvest profits: Rather than distributing all profits, reinvest in the business for growth (e.g., marketing, technology, hiring skilled employees).
2. Expand market reach: Explore new markets, both domestic and international, to increase revenue streams.
3. Build partnerships: Collaborating with other businesses can help you access new customers, share resources, and expand your operations.