What is an SME? What you need to know

Most UK businesses are classified as small businesses, but not all small businesses are SMEs. It may not seem important, but the classification of a business can affect how you run it.

Several factors determine whether or if your business is classified as an SME. Let's take a quick look to see where your business fits in.

What is an SME?

The UK government defines SMEs into three categories, based on employee numbers and turnover:

Microbusiness - less than 10 employees and an annual turnover under £2 million

Small business - less than 50 employees and a yearly turnover under £10 million

Medium-sized business - less than 250 employees and a yearly turnover under £50 million

SMEs, though small in size, contribute significantly to our economy. SMEs outnumber larger companies vastly and employ vast numbers of employees. They are generally entrepreneurial and help to shape innovation for companies.

According to the EU, a small business is a company with fewer than 50 employees, and a medium-sized business is a business with fewer than 250 employees. There are micro-companies (with fewer than ten employees), small companies (with between 10 and 50 employees), medium-sized companies (between 51 and 250 employees) and large companies (more than 251 employees).

SMEs are commonly used by the European Union, the United Nations (the UN), and the World Trade Organisation (WTO). In contrast, in the United States, they are often referred to as small- to mid-sized businesses (SMBs). Elsewhere, they call them MSMEs in Africa, which stands for micro, small, medium, and large enterprises. In India, they're called MSMEDs, or micro, small and medium enterprise development. Countries share the commonality of dividing their businesses into different sizes or structures.

Your balance sheet matters

The UK definition of small business includes employee numbers and turnover, whereas the EU definition also considers whether the company has a profit or loss statement. A balance sheet shows the assets (what your business owns) and liabilities (what it owes). It can show how valuable your business is at any given time.

Business size Annual balance sheet total Microbusiness Equal to or less than €2 million Small business Equal to or less than € 10 million Medium business Equal to or less than €43 million

Your energy usage matters

When working out which type of contract would be most suitable for your business, brokers and suppliers will look at the Ofgem SME definitions. Below you can see the definition of micro, medium, and large businesses by their annual energy consumption, ordered by the average annual energy consumption.

How much electricity does your business use?

Here's a guide to average business electricity usage to give you an idea of how much energy your business should be using.

Business size Electricity use by kWh

How much gas does your business use?

Here's a guide to average business gas usage to give you an idea of how much energy your business should be using.

Business size Gas use by kWh

Your business size affects the insurance costs

Most businesses will take out business insurance to protect their financial security. It's not officially recognised by any official bodies outside the insurance industry, but it's an excellent way to clarify what an SME company is.

Business size Insurance premium cost per year

Are there any exceptions?

There are some exceptions when determining the size of your business. The main one is that an enterprise (a business) must be autonomous or part of a larger group of affiliated enterprises that collectively fall into the above categories.

It means your business must be completely self-sufficient. To be classified as an SME, your business must not hold more than 25% of capital in any other company, or the business must not have more than 25% of the money in your industry.

If, for example, your business is a franchise or has a close working relation­ship with another enterprise, and you exceed the threshold defined by the SME definition, then this means you cannot be described as an SME.

Are you a small business owner?

To determine your company’s size, first, calculate its employees. You must also compare it to either the turnover or profit numbers.

If you meet these requirements, you can claim your business as an SME. 

What are the benefits of declaring myself as an SME?

The size of your company can affect everything from your business credit rating to the energy rates you’re offered and the amount you’re able to borrow through a business loan. It also impacts the amount you need for tax purposes such as Value Added Tax (VAT) and National Insurance Contributions (NICs).

If you run a small business, you may be eligible for specific grants and other types of funding. Business grants don't require repayment, but they come with certain conditions and may only be used for particular projects. 

Why do SMEs fail?

Starting as an entrepreneurial venture is not without its challenges. There are many reasons why a start-up might fail. For example:

Failing to balance the money coming into and going out of a business is a considerable risk. Keeping a budget cash flow lets you better understand the business's health and helps you take steps to manage any potential problems early on.

You're probably going to be very good at making or selling your products or providing excellent service. Still, you also need to be able to manage people, run a business, and handle finances. 

Planning is essential if you want to succeed. You need to plan carefully. Having an accurate business plan and doing a thorough SWOT analysis helps identify potential strengths and weaknesses before you start.

Work out what you're offering

What makes your new business unique from the competition? Figure out what you're offering, what makes you different from your competitors, and what makes you valuable.

Find customers

You need to write down the marketing activities you'll be conducting to get yourself in front of new customers.

Government Incentives

Small and medium-sized enterprises (SMEs) aren't always easy. These businesses usually struggle to attract capital to finance their endeavours and often have trouble paying taxes and meeting regulatory requirements.

Governments recognise the importance SMEs play in the economy and regularly provide incentives, including favourable tax treatments and better access to loans to help keep them in operation.

They also provide educational programs, coaching SME business owners on how to grow their businesses and survive, and special audits to target high-risk areas and boost tax compliance for corporations.

Conclusion

SME stands for Small & Medium Enterprise. It describes small businesses as being run by a single person but large enough to require multiple employees.

An SME is typically owned and operated by a sole proprietor, although partnerships and corporations are not uncommon. The term “small” refers to the company's size, whereas “medium” describes its scope.

SMEs are generally smaller than larger companies and tend to be less complex. They usually focus on a specific niche market, such as retail stores, restaurants, or services.

Are you looking for recruitment support in your SME? Reach out to find out more

Get In Touch