What Is an SME (Small and Medium-Sized Enterprise)

To discuss what SME Small and Medium-Sized Enterprise) is, we first need to talk about business. Apart from generating a profit, its fundamental purpose is to express the inborn human daring to transform one thing into another. 

When this new thing, which we’re used to calling a product, serves not only its manufacturer but solves other people’s problems and they’re willing to pay for it, it may be called business. So, originally business delivers value and furthermore contributes to society by creating employment, for example.

It’s been ages since the word – though spelled and pronounced differently – has entered the vocabulary, meaning a person’s occupation with which they earn their living. Back in those days, it was usually a single person’s labour.

Today business is defined as an organisation engaged in commercial, industrial or professional activities. And an organisation is a group of people, formed with a particular purpose. Now, business is often executed by more than one person.

What is an SME?

Companies are classified by their size in the following three categories:

• Small enterprises;
• Medium-sized enterprises;
• Large enterprises.

A company’s employees, its turnover and its assets are considered for the classification. Of these, the number of employees is the most common criteria, though some economists argue that turnover is a more appropriate measure of the relative size of a business.

The acronym SME stands for small and medium-sized enterprises. 

There are three subcategories: 

• Micro-enterprises which have up to 10 employees;
• Small enterprises with 10 to 49 people;
• Medium enterprises – employing between 50 and 249. 

Companies that employ 250 people and more are considered large.

It is, however, important to mention – the numbers here are not universally accepted. Different countries, intergovernmental organisations such as the European Union and institutions appoint different numbers to the number of people employed when it comes to a company’s classification in terms of its size. And the difference is often immense.

A quick illustration: the World Bank considers an SME a business of up to 300 employees, with revenue and assets of $15 million at most for each. According to the United Nations Development Programme, such a company has 1 to 200 employees and does not take turnover and assets into consideration.

SME definition in the UK

The UK government and Companies House reckons enterprises, which employ 1 to 9 people and have an annual turnover of less than £2 million, as a micro business. 

A small business has between 10 and 49 employees and up to £10 million in turnover. 

When 50 – 249 people work for a company and its turnover is between £10 and £50 million yearly, it is a medium-sized enterprise.

SMEs in the EU

The EU’s definition of SME coincides with the UK’s, with two differences. One is that all amounts are in euros. The other is that the EU definition has an additional classification criterion – the balance sheet total. It displays the assets and the liabilities of a business – what it owns and what it owes.

This account can be used as a reference for the business’ value on a date. For the micro-enterprise, the balance sheet total should not exceed €2 million, for the small – €10 million and medium-sized company’s balance sheet total should be under €43 million.

SME in the US

The US’s Small Business Administration there handles the classification. This business development office considers factors like ownership structure, number of employees, earnings, and industry when categorising a business by size.

Thus, both a company of up to 500 employees and another which employs up to 1,500 may fall into that category, depending on the industry in which each of these operates. 

Still, what the UK and the EU call micro business is also recognized as such in the US, though it may be found under the name SOHO (small office/home office), essentially running a business from home.

What is an example of an SME company?

Your hairdresser, the bar & diner at which you love spending evenings with friends, the flower shop around the corner, the taxi company that you keep on speed dial, and your neighbourhood dry cleaners fall in the definition of definition of an SME.

The category of small and medium sized businesses may also include a fitness chain with several clubs scattered in town, a newspaper or a magazine, a car rental company, consultants – lawyers, accounting firms and insurance experts.

The SME definition results in SMEs comprising the bigger part of the business population in the UK economy. 

The percentage may vary by country, yet it makes up over 95% of the entire private business. Therefore, they play a significant role in the sector’s growth. They create more quality jobs, are more innovative, and grow faster than larger enterprises.

What is the role of SMEs in an economy?

Overall, the role of micro businesses, small businesses and medium sized businesses in an economy is critical. These businesses contribute in significant ways to a country’s economic growth. 

They create employment, whether they have fewer than 250 employees or not, and they also contribute to the national gross domestic product. In some cases, small and medium sized enterprises can get tax relief and even small business grants in order to get set up and established.

How SMEs differ from sole proprietors

Though it may be hard to distinguish SMEs from sole proprietors at first glance, they are distinct entity types. A small company and medium sized enterprises are registered companies whose owner – one or several – is not self-employed, but is rather the company’s employee. 

A sole proprietorship is one of three self-employed varieties. The others are Partnership and Independent Contractors.

When one is registered as a sole proprietor, one usually works on their own. Small and medium-sized enterprise entrepreneurs often have others work for them. In fact, apart from or instead of employing personnel, the owner of a business may hire a self-employed person to do a particular job or for a longer period.

Another key consideration lies in the business’ liability for debts accrued. Large businesses with higher operating revenue and higher employees and a turnover are generally not held personally liable for the debts or liabilities incurred by the business. 

They are “shielded” from this and are not liable in their personal capacity. The same, however, does not hold true for sole proprietors, whose personal and business liabilities tend to meld into one.

The advantages of being an SME

It’s almost like a micro entity or a medium sized company falls outside the boundaries of business – the smaller, the nimbler. 

As the definition of SMEs suggests, their organisational setup facilitates faster and better decision-making. People in the team are usually invited to take part with input, whereas when a corporate employee suggests an idea – no matter how brilliant – it may take months before it’s implemented.

Small and medium-sized enterprises are closer to their clients and know them first-hand. The larger the company, the more its customers become numbers on spreadsheets, columns in histograms, and slices in pie charts.

The SME owner knows everyone in their staff and is often on quite a personal level. This may help for better relations in the team.

It is believed that micro entities and small and medium sized businesses can hardly afford to hire the best-educated workforce. Yet, luxury education doesn’t mean excellence, just as the lack of higher education doesn’t certainly deprive a person of outstanding skills. Their personnel tend to be more flexible, multi-talented and often the driving force behind the business’ growth.

The downsides of small and medium-sized enterprises

As it often happens, one’s strengths are also their weaknesses. Small and medium businesses’  flexibility may easily turn into chaos unless the owner – or whoever they appointed to be the manager – has strong organisational skills.

They have difficulties in funding their growth. Banks are reluctant to take risks, providing a medium business with loans. The lack of clarity and uniformity around their definition may prevent some of these from gaining government support.

This makes it harder for SMEs to promote themselves in front of a wider audience. They have less bargaining power, so products and services they need to use to function, sometimes cost them more. Hence, it’s harder for such businesses to compete with the same industry giants in pricing.

Economic crises are harder for small and medium-sized enterprises to endure. The mere extent of the overall distress that may cause a shakeup in the business is lower compared to what is likely to disturb a large venture.

Risks that SMEs usually face

Running out of money is dangerous for anybody. And this puts small and medium sized companies out of the game. 

Here are the most common reasons behind the failure of a small business:

• A small business owner is usually a passionate professional who knows their industry well. Yet, while they may deliver a great product or service, they may lack knowledge and experience in other domains, crucial to the venture’s well-being.

• Management, finance, marketing and sales are examples of common blocks, upon which SMEs stumble. Since it takes time and other resources for a person to gain new knowledge, owners often can’t afford an upgrade. And they can hardly afford to hire the personnel to cover for their limitations.

• Poor management is apt to invoke much turbulence upon the entire functioning of a company. And it often means poor planning, too. Inconsistencies between long-term vision – which frequently is altogether missing – about the direction the undertaking should follow and the necessity to run its day-to-day operations are both the result of the shortcomings mentioned above and among the reasons a small enterprise might fail.

Conclusion

When it comes to what a small and medium-sized enterprise is, nearly every country has its own definition. Sometimes, from country to country, and from government body to another, the differences are substantial. 

Besides the criteria and the numbers (for instance, determining turnover) by which a business may classify as SME, there is a variety in the abbreviations. You may come across SMBs, MSMEs, and MSMEDs – all are used in the business world to denote small and medium-sized enterprises.

Regardless of the disparities, there’s a universal consensus on the fact that SMEs make up the major part of a nation’s economy, employing huge amounts of the workforce and forging innovation.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.