Small and medium enterprises (SMEs) are businesses that fall below certain thresholds in size, workforce, and revenue. These businesses are usually privately owned and operate within the local jurisdiction and often provide a strong link with the local community. SMEs employ a large number of people and are often given tax breaks, incentives for financing, and favorable taxation. They are also a driving force in the economy and have a large role to play in innovation. However, the definition of a small enterprise is quite different in each country.
The European Union (EU) defines an SME as an organisation that is under 250 employees, has a balance sheet total under EUR 43 million, and has annual revenues less than EUR 40 million. Although these are not necessarily exact measurements, this is a good place to start. In the United States, the Small Business Administration (SBA) uses a similar approach, but classifies businesses based on industry rather than number of employees. For example, the SBA distinguishes a business with fewer than 10 employees as a small office or home office, while a company with more than 500 employees is a small manufacturer.
In China, a small enterprise is defined as any retail business that has an annual operating revenue under $1 million. A micro-business, on the other hand, is one with fewer than five employees. Generally, the smallest SMEs are those that require a minimal amount of capital to start. Unlike a large corporation, a micro-business does not need to have heavy machinery.
As a matter of fact, a small company that has the largest number of employees in the industry might not be the best choice, as the SBA has found that in most cases SMEs tend to operate in sectors with a smaller number of employees and a higher level of productivity. Moreover, SMEs have the opportunity to implement new technologies that might not be feasible in larger organizations. Similarly, a micro-business has the ability to create an efficient system that could cut costs without compromising the quality of its product.
SMEs are typically considered the most important component of the economy. As a result, many governments provide a variety of aid programs to keep SMEs in business. Some countries, such as Japan, Indonesia, and South Korea, have devoted dedicated ministries to support SMEs. Other nations, such as Canada, France, and the UK, have development banks designed to support SMEs. Several countries have developed formal definitions and rules of engagement that allow SMEs to benefit from the same economic opportunities as the large players.
As a result of their low numbers, SMEs are often able to provide better customer service than bigger organizations. In addition, SMEs are often able to leverage new technologies to lower costs and improve productivity. This, in turn, allows them to remain in the local community for longer periods.
Despite their small sizes, SMEs are a vital part of the global economy. According to the SBA, SMEs account for nearly half of the total U.S. workforce and have a significant impact on job growth.