What Are Small and Medium Enterprises (SMEs)?

An SME is a company that has employees, revenue, and assets below a set threshold, but defining that threshold can be difficult. Discover how different regions define an SME, and how your small or medium-sized company can play to its strengths.

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Small and medium-sized enterprises (SMEs) account for a major part of the global economy, year in, year out. Despite this, getting a consistent definition of what an SME is can be difficult. Not only does the definition change among countries, but it also changes among industries and governing bodies. If a business isn’t clear on its classification, deciding on the right strategy to succeed can prove impossible.

Most definitions of small and medium enterprises stem from the number of employees a company has. Whether you have 50 employees or 500, what’s important is building a strategy based on your current size and potential for growth. That means identifying the solutions that will provide the best value, providing a scalable employee experience, and choosing the right partners to take you from a micro business to a global presence.

What Does SME Stand for?

SME stands for small and medium-sized enterprise, often used interchangeably with SMB, small-to-midsize business, or small and medium-sized business. SMEs are businesses with roughly 500 employees, though that threshold differs between regions and industries. Other factors can also influence the classification of an SME, such as annual revenue and held assets.

Generally, SMEs are organizations with roughly 500 employees, though that threshold differs between regions and industries.

As such, that SME definition is only a small part of the wider picture. Since each country has different classifications and corresponding guidelines, it's important to carry out further research. Here are how several different jurisdictions define an SME differently, depending on the type of business.

How Does the U.S. Define SMEs?

Compared to other countries, the U.S. often skews higher in its figures when defining an SME. A good reference point is the Small Business Administration (SBA), a U.S. government agency intended to assist small businesses. It classifies small businesses based on either average annual receipts or average number of employees.

To qualify as a small business, companies generally have to employ fewer than 500 employees. However, those size standards differ based on industry averages. Manufacturing tends to be higher, while wholesale trade is lower. Here are a few examples indicating the possible variance:

  • Ice-cream and frozen dessert manufacturing: 1,000 employees
  • Solar electric power generation: 500 employees
  • Furniture merchant wholesalers: 100 employees

While the cap for defining an SME differs, the lower threshold is more consistent. The SBA normally identifies any company with fewer than 10 employees as small offices/home offices (SOHO).

How Do the EU and UK Define SMEs?

For the most part, the EU and the UK agree on how to define an SME. However, in 2022, the UK government changed the max employee count for an SME from 249 employees to 499 employees. Otherwise, the UK and EU governing bodies still share the same definitions for micro, small, and medium-sized enterprises. They are as follows:

  • Micro businesses: 0 to 9 employees, with annual turnover (i.e. revenue) or a balance sheet not exceeding €2 million
  • Small business: 10 to 49 employees, with annual turnover or a balance sheet not exceeding €10 million
  • Medium business: 50 to 249 (EU) or 50 to 499 (UK) employees, with annual turnover under €50 million or a balance sheet under €43 million

In addition, the UK has different rules and definitions depending on the governing body. For example, the Companies Act 2006 codified the following different categories: micro entities, small companies, and medium-sized companies. As used by Companies House, each of these classifications has a different threshold to the ones mentioned above. Being aware of how these different classifications and categories impact you is critical when dealing with different agencies in the UK.

How Does China Define SMEs?

The system for defining SMEs in China is complex, though it follows similar patterns to other jurisdictions. China’s SME Promotion Law 2003 considers three factors: the number of employees, total assets, and operating revenue. As with the U.S., the industry that a company works in further influences the boundary lines for each category. Here are a few examples of how different industries affect the thresholds.

The SME Promotion Law defines Chinese construction companies as:

  • Small if they have fewer than 600 employees, under 40 million RMB total assets, and under 30 million RMB revenue
  • Midsize if they have fewer than 3,000 employees, under 400 million RMB total assets, and under 300 million RMB revenue

Conversely, it defines Chinese retail companies as:

  • Small if they have fewer than 100 employees and under 10 million RMB revenue
  • Midsize if they have fewer than 500 employees and under 150 million RMB revenue

There are 33,185,550 small businesses in the United States, making up 99.9% of American businesses.

China’s most recent Five-Year-Plan called out SMEs specifically, setting targets to increase their annual growth rate and per-capita operating income by 2025. Moving forward, it’s evident that the SME will play a major role in China’s economy—but why does it matter on a global scale?

Why Does It Matter If a Business Is an SME?

According to the SBA, there are 33,185,550 small businesses in the United States, making up 99.9% of American businesses. Similarly, in the UK SMEs also made up 99.9% of the business population in 2023, totaling 5.5 million SMEs. And in China, SMEs make up 60% of the total GDP and account for 50% of the nation’s tax revenue. SMEs aren’t just prolific; they’re critical to the lifeblood of the global marketplace.

Many SMEs that want to target exponential growth seek to emulate large businesses. However, that can often be a mistake. A business with fewer than 250 employees doesn’t (and shouldn’t) function in the same way as an enterprise company. Leveling the playing field between an SME and a larger company involves playing to your strengths, not theirs.

After confirming that your business qualifies as an SME, the next step should be to strategize based on your existing scale. SMEs benefit from several factors that a larger company can’t:

  • Flexibility: It should come as no surprise that SMEs are far more agile than large enterprise businesses. Not only can SMEs pivot to target emerging market trends, they can also be more flexible with their tech stack. Where enterprises might be entrenched with outdated technologies, SMEs can embrace new working models far more readily.

  • Innovation: Where large enterprises tend to iterate on existing products, SMEs often develop new products and services. But that scope for innovation shouldn’t only be reflected in SME’s offerings to customers. SMEs should be at the forefront of internal innovation, whether that’s connecting and streamlining data silos, making use of artificial intelligence, or empowering employees with self-service options. 

  • Funding and support: One of the major disadvantages small and medium-sized companies face compared to larger competitors is their access to funding. Fortunately, as mentioned above, many governments across the world have initiatives in place to support SMEs. Taking advantage of these initiatives is a major reason to seek official classification as an SME.

How to Promote Long-Term Growth as an SME

In 2023, SMEs employed 61.7 million Americans, accounting for 46.4% of the total private sector workforce. Facing such fierce opposition, SMEs must make use of every competitive edge they can get. That means choosing tried-and-tested solutions and working with trusted partners with a proven track record.

In China, SMEs make up 60% of the total GDP and account for 50% of the nation’s tax revenue.

Choosing the right vendor for your business means finding solutions that work for every business, small or large. That means it should be intuitive enough for a smaller team to work with, and have the advanced features required by a larger enterprise. That way, expansion is easy at every stage of your company’s development.

At Workday, we understand the tremendous value SMEs bring to the global economy and how they work best. In fact, SMEs play a major role in our business, accounting for more than 75% of our customer base. That’s because Workday is flexible enough to meet the needs, service levels, and desired business outcomes of a company with 1,000 employees or a company with 10,000 employees.

To learn more about how Workday can support your continued growth, read more about how our solutions work for organizations of all sizes.

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