What’s in a name?

  • 11-18-2011

What’s in a name?

What is an SME? Is it any different to an SMB? Are employee numbers more important to the definition than turnover? CRN attempts to untangle the web

An illustration of William Shakespeare

Shakespeare famously said that a rose by any other name would smell as sweet, and that may generally prove true. Yet in business, names and definitions really do matter - not least for companies at the smaller end of the scale.


Phil McCabe, media and PR manager at the Federation of Small Business (FSB) (pictured), says even unwieldy definitions can be important to the bottom line.


“Smaller or privately owned businesses may require certain classifications because of red tape or tax. However, entrepreneurs are risk takers, and some do not like to be defined,” McCabe adds. “The most important aspect is the number of employees. Anything below 250 is what I would suggest an SME would be. However, this may not always be the case.”


Unsurprisingly, the European Commission (EC) has a definition of SME it would like all member countries to adopt. In a 2003 recommendation, it says SMEs (including micro-businesses) must “fulfil maximum ceilings for staff headcount; and either a turnover or a balance sheet ceiling”.


A 2009 document, Report on the Implementation of the SME Definition, went on to define a micro-business as having fewer than 10 staff, and a turnover or balance sheet of less than or equal to €2m (£1.71m) per annum.

A small business, it says, must have fewer than 50 staff and a turnover or balance sheet of less than €10m. A medium-sized business comprises fewer than 250 employees and revenue of less than or equal to €50m or a total balance sheet equalling no more than €43m each year.


According to the EC, SMEs - which it believes comprise 99 per cent of all businesses based in the EU - definitely have something to gain by falling into the official definition.


“SMEs generally benefit from larger aid intensities. The aid intensity ceilings under the GBER for medium-sized enterprises usually exceed the ceilings for large enterprises by 10 per cent, and the ceilings for small and micro-enterprises are 20 per cent higher than those for large,” the 2009 paper states.


“In 2007, total state aid for industry and services in EU27 accounted for €49bn, of which a large share [went] to SMEs, including specific aid granted exclusively to SMEs of €4.7bn.”


Having a definition enshrined in law facilitates initiatives such as equity financing for smaller companies, by granting favourable treatment to certain categories of investor - such as regional funds, venture capitalists and business angels.


CRN itself uses the term small to medium-sized business (SMB) rather than SME, except perhaps if it is the term a person interviewed actually used. That has more to do with the need to have a consistent house style than any industry classification.


In the UK, the Companies Act 2006 sections 382-384 include a definition of small companies for accounting purposes.


They state that a company, or a group of companies, qualifies as small if it has fewer than 50 staff and a turnover of less than £6.5m net or £7.8m gross per annum. Small companies must have less than £3.26m net or £3.9m gross on their balance sheets in the year in question. When it comes to the balance sheet, the UK is rather less generous than the EU.


The company must meet two out of three of the requirements. Certain companies are excluded, such as insurance companies, banking firms and public companies.


Sections 465-467 define medium-sized companies or groups of companies as those with 250 employees or fewer, turnover of up to £25.9m or balance sheets totalling not more than £12.9m. Again, certain types of firm are excluded, and the company in question must meet two out of three of the requirements in a given year.


Peter Gradwell, managing director of Bath web host Gradwell, says it is difficult to try to conceive of a “typical” SME.


“By their very nature, SMEs are individual and unique. One clear difference, however, is that on paper, the company structure is often very different from mid-market companies,” he says.


He notes that an SME may be more likely to be headed by an entrepreneur who wears many hats, from accountant to customer service officer, technical support to sales and marketing.


“The person at the top is the initiator. He or she makes all the decisions and is responsible for delivering them, whereas in a mid-size company you tend to see more delegation and specialist knowledge,” says Gradwell.


Larger enterprises and US-based companies may also offer a different answer to the question. John Antunes, UK director of SMEs and channels at German software giant SAP, says it defines an SME as a business with up to £500m in revenue. “That is regardless of the number of employees,” he adds.


Chris Price, managing director at Epson UK, agrees you cannot always go by the number of employees or earnings in isolation.


“Epson UK employs fewer than 250 employees, with a turnover of £250m, disregarding the usual turnover such a company would produce, so it is not always so simple,” he says.


However, Henry West, head of channel sales at Eclipse Internet, notes that the most workable defin-ition can depend on what you are doing at the time.


“As with the revenue, budget and number of sites approach, this [SAP’s definition] works well enough when you are exploring and profiling your existing customer base, but becomes problematic when prospecting new business,” he adds.

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