Definition: SME (Small or Medium-Sized Enterprise)
An SME refers to a small or medium-sized enterprise. Despite its ubiquitous usage, there is no standardized definition of an SME based on measurements such as net worth, annual turnover, profits, or the number of employees. Definitions vary by country and organization, impacting tax implications and eligibility for support programs.
Examples of SMEs
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Local Bakery Shop:
- Number of Employees: 10
- Annual Turnover: $500,000
- Net Worth: Not applicable (Owner-managed)
-
IT Consulting Firm:
- Number of Employees: 45
- Annual Turnover: $8 million
- Net Worth: $2 million
-
Manufacturing Unit:
- Number of Employees: 200
- Annual Turnover: €40 million
- Net Worth: €20 million
Frequently Asked Questions (FAQs)
Q1: What is the principal difference between a small and a medium-sized enterprise? A1: The difference is primarily based on the number of employees, annual turnover, and net worth. In the EU, a small enterprise generally has fewer than 50 employees, while a medium-sized enterprise has fewer than 250 employees.
Q2: Are there different definitions of SMEs in different countries? A2: Yes, definitions vary greatly. For example, the UK has different criteria for accounting purposes, tax allowances, and government schemes, while the EU’s definition is based on fewer than 250 employees and specific financial thresholds.
Q3: Why do banks and insurance companies have their own definitions of SMEs? A3: Banks and insurance companies have their own definitions to assess risk, tailor services, and offer products suitable for businesses of varying sizes and financial statuses.
Q4: How does the EU define an SME? A4: The EU defines an SME as an entity with fewer than 250 employees, an annual turnover of no more than €50 million, and a net worth of no more than €43 million.
Q5: What is the significance of defining a business as an SME? A5: Being classified as an SME can impact tax treatment, eligibility for grants, loans, and government support programs designed to assist businesses of a particular size.
Related Terms
- Small Company: In the UK, a company with an annual turnover of not more than £10.2 million, a balance sheet total of not more than £5.1 million, and no more than 50 employees.
- Medium-Sized Company: In the UK, a company with an annual turnover of not more than £36 million, a balance sheet total of not more than £18 million, and no more than 250 employees.
- Turnover: The total sales revenue received by a business within a specific period, not including VAT.
- Net Worth: The total assets of a company minus its total liabilities.
Online References
- European Commission - SME Definition
- UK Government - Small Business, Enterprise and Employment
- InvestorWords - SME Definition
Suggested Books for Further Studies
- “Small Business Management: An Entrepreneur’s Guidebook” by Mary Jane Byrd & Leon Megginson
- “Scaling Up: How a Few Companies Make It…and Why the Rest Don’t” by Verne Harnish
- “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses” by Eric Ries
Accounting Basics: “SME” Fundamentals Quiz
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