Small and Medium Enterprise (SME) - Definition, Characteristics, & Examples

Every business has a journey. Their endings might be different but starting is always the same i.e. from a small-scale business to a large-scale business. But in many cases, the business might remain small/medium-sized throughout its life-cycle. These types of businesses come under small and medium enterprises (SMEs).

The number of SMEs in the world is way more than large companies and employs many more employees collectively. Each country has its own standards to identify SMEs.

So, let us understand the concept of SMEs.

What is SME?

Small and medium enterprises are privately owned businesses whose capital, workforce, and assets fall below a certain level according to the national guidelines.

Local restaurants, grocery stores, garages, etc. that serve a hyperlocal target audience usually fall under the blanket of a small-to-medium-size enterprise as they generate less revenue and operate with less than a certain level of workforce and assets.

Legal Definitions Of SME In Different Countries

Legal definition and standards for identifying a small business vary from country to country.

India

In India, SMEs are identified on the basis of the investment.

In the case of small enterprises:

The manufacturing sector’s investment in plant & machinery should be more than 25 lakh rupees and less than 5 crore rupees.
The service sector’s investment in the equipment should be more than 10 lakh rupees and less than 2 crore rupees.

In the case of medium enterprises:

The manufacturing sector’s investment in plant & machinery should be more than 5 crore rupees and less than 10 crore rupees.
The service sector’s investment in the equipment should be more than 2 crore rupees and less than 5 crore rupees.

USA

In the United States, the definition of SMEs changes according to the industry.

Agriculture: a maximum of $750,000 average receipts.
Mining: a maximum of 250 to 1,500 employees.
Utilities: a maximum of 250 employees (for renewable electric power generation subsectors) to 1,000 employees (for electric power and natural gas distribution businesses).
Construction: a maximum of $36.5 million in average receipts.
Manufacturing: a maximum of 500 to 1,500 employees.
Wholesale Trade: a maximum of 100 to 250 employees.
Retail Trade: a maximum of $7.5 million in average annual receipts (for one-third of retail trade industries). A maximum of 100 to 500 employees for the rest of the sub-industries.
Transportation and Warehousing: a maximum of 500 to 1,500 employees. A maximum of $7.5 million to $37.5 million in average annual receipts for some sub-industries.
Information: a maximum of 500 to 1,500 employees, and a maximum of $7.5 million to $38.5 million in average annual receipts.
Finance and Insurance: a maximum of 1,500 employees, and a maximum of $32.5 million to $38.5 million in annual receipts.
Real Estate, Rental, and Leasing: a maximum of $7.5 million to $32.5 million in average annual receipts.
Professional, Scientific, and Technical Services: a maximum of 1,000 to 1,500 employees or a maximum of $7.5 million to $20.5 million in average annual receipts.
Health Care and Social Assistance: a maximum of $7.5 million to $38.5 million in average annual receipts.

UK

In the United Kingdom, SMEs are defined on the basis of the number of employees, turnover, and balance sheet total.

In the case of small enterprises, turnover should not be more than £6.5 million, a balance sheet total of not more than £3.26 million, and employees not more than 50.

In the case of medium enterprises, turnover should not be more than £25.9 million, a balance sheet total of not more than £12.9 million, and employees not more than 250.

South Africa

In South Africa, the previous definitions of SMEs were amended in 2019.

Now, there SMEs are identified on the basis of two measures instead of three. They are – `total full-time equivalent of paid employees’ and `total annual turnover’.

Singapore

In Singapore, the Ministry of Trade and Industry re-defined the definition of SMEs in 2011.

SMEs are defined as businesses having an annual sales turnover of S$100 million, or that employs not more than 200 workers.

Characteristics of SMEs

Irrespective of different definitions of SMEs in different countries, the characteristics of such businesses remain the same.

Limited Investment: The capital requirement of an SME is less as it operates on a small scale.
Labor-Intensive: SMEs usually don’t require heavy or sophisticated machinery. Hence, it uses more labor-intensive techniques.
Less Number of Employees: SMEs requires a smaller number of people as compared to large corporations, due to their small scale of operations.
Local Area of Operations: SMEs operate locally and remain there for longer periods of time (years or maybe decades) which helps it to build a strong relationship with local customers.
Management: In most cases, a single owner or a small group of individuals handles the management of the business.

Importance of SME

Nowadays, SMEs have become the supporting pillar of any economy in the world in many ways. Without them, the economy cannot survive.

The importance of SMEs can be highlighted by the following points:

Utilization of Local Resources

Opening up of small and medium-sized businesses in rural areas or small towns helps in better utilization of resources in that particular area. If a town is rich in iron ore mines, then factories will open up for the effective utilization of that resource.

Employment Generation

SMEs are the best solution to unemployment in any country. It provides job opportunities for local people. Especially, in developing countries like India, where unemployment has been a major problem, these businesses provide relief.

Opportunities to New Entrepreneurs

The major role of SMEs in any country is to cultivate new entrepreneurs. Since small businesses are easier to set up and require less capital, it creates a perfect option for young entrepreneurs to test their skills and grow.

Development of Local Areas

The development of an area largely depends upon the number of businesses it has. Setting up small businesses helps in providing employment to the local population and removing regional imbalances.

Improvement Of The Quality of Life

SMEs help the locals by providing them jobs. This increases the per capita income of the household which improves their quality of life.

Advantages of SME

Some of the main advantages of an SME are:

More Flexible

SMEs are more flexible when it comes to adapting to change. This is because they are small in size, runs on a simple business model, and are closer to their customers. This helps SMEs to identify any kind of opportunity that arises in the market before any competitors.

Close Relationship with Customers

This is one of the greatest perks of SMEs. While large corporations pour a lot of money to connect with their customers, SMEs do it easily.

SMEs operate locally and have a smaller customer base, which makes it possible to maintain close relationships with its customers.

Fast Decision-Making

In most cases, small and medium-sized businesses are run by an individual or a small group of people. So, decisions are taken fast as compared to large corporations where it takes time to debate and arrive at a decision.

Better Communication

SMEs usually employs a small group of people. There is no need for a separate department for hiring employees, all the activities are managed by the owner. He/she keeps track of all the employees and communicates with them effectively.

Better Control Over Business

The owner manages all the operations of the business effectively as it is small in size. This leads to better control over the business.

Disadvantages of SME

Everything has its pro and cons and SMEs are no different. So, let us look at some of the disadvantages of SMEs.

Less Use of Technologies

Due to less capital, SMEs rely heavily upon labor-intensive techniques instead of capital-intensive techniques. Another reason is that small businesses run on a traditional business model that requires less use of modern technologies.

Difficulty In Funding

Acquiring funds for an SME is not easy as banks hesitate to hand out loans. This is because a lot of businesses don’t last long.

The owners of SMEs mostly get their funding from family & friends or use their own savings.

Less-Skilled Employees

Highly skilled employees demand higher pay. So, due to less capital, SMEs settle for less-skilled employees.

Risk

Risk is always there in running a business, even if the business model is structured to be risk-free, it cannot be eliminated completely.

Stress

It is not easy to manage all the departments of the business alone. This is why, many times, managing becomes a burden and takes a toll on the mental health of an entrepreneur.

In the initial stages of setting up a business, entrepreneurs do extra hours of work ignoring their health which leads to many mental health problems like anxiety and stress.

Startups vs SMEs

Small and medium-sized businesses are often confused with startups. Many young entrepreneurs call their small business a startup. In businesses, the use of proper terminologies is important to avoid any problems that might arise out of it in the future.

This happens because of a lack of knowledge about the two terms. So, let us understand the key points of difference between the two.

Technology: Startups usually use high-end modern technologies while SMEs require less use of technology.
Business Model: Startups choose an unconventional business model, while SMEs choose a tried and tested business model.
Innovation: A unique feature of a startup is disruptive innovation. Startups create new offerings or innovate the existing ones, while SMEs deal with existing offerings.