What is SME: Decoding the Drivers of Our Global Economy

Small and medium enterprises (SMEs) power many countries' economies worldwide. 

This happens because SMEs make up the majority of businesses and are critical for creating jobs, driving innovation, and supporting stable communities. They tend to be more flexible and adaptable than large corporations, allowing them to quickly change with market conditions and customer needs. 

But what exactly are SMEs, and why do they play such a critical role in the business world? 

This guide will explore SMEs in detail. It will explain their definition, show their importance to the business, and examine their significant challenges worldwide.

SME Classifications by Regions

The definition of an "SME" stands for small and medium-sized enterprises. 

However, its precise definition can differ significantly from region to region and across different industries. There is no single universal way to classify an SME that is accepted everywhere. 

Generally, though, SMEs are categorized based on factors such as:

• Total number of employees
• Annual sales revenue
• Total assets owned.
• Or some combination of these criteria

How SMEs are Categorized in Different Regions

• United States: A small-scale business with less than 500 workers. But sometimes, like in certain types of mining, a company can have up to 1,500 workers and still be considered an SME.
• United Kingdom: Mini businesses generally comprise businesses with fewer than 500 employees, although the medium or micro business definition in the EU is a business with fewer than 250 employees. 
• European Union: Contains fewer than 250 employees and makes less than 50 million annually categorized as a medium-sized business.
• China: Here, what counts as a micro business can depend on how much money it makes, how many people work there, and how much it owns. 
• For example, a shop might be considered small if it has less than 250 employees and makes less than 10 million RMB annually.
• Developing Countries: In some countries, people use the word “MSMEs.” (Micro Small Business Enterprises). This means businesses that are very small, minor, or medium-sized that have up to 10 employees. 

However, the universal rule of thumb is that a business with 250 or fewer workers is usually called a small or medium-sized business. 

Examples of an SME Across Industries:

• Retail: A local boutique clothing store with only 15 total employees
• Manufacturing: A family-owned bakery with 75 workers and $8 million in annual sales revenue
• Services: A digital marketing consultancy firm with 50 employees and $3 million in yearly revenue
• Technology: A software startup company with 120 employees and $12 million in total assets
• Consulting: A management consulting firm with fewer than 500 employees and $25 million in annual revenue

Discover more about: The Biggest Challenges SMEs Face and How to Overcome Them

The Vital Role of Small Companies in Enterprise Ecosystems

While small enterprises are categorized as "small" or "medium" in size, their collective impact on the global economy is massive. Here's why micro enterprises play an essential role across enterprise ecosystems worldwide:

Driving Innovation and Agility

• They pioneered many new products, services, and innovative business models.
• Their small, nimble structure allows them to adapt and pivot rapidly when market conditions shift.
• Compared to giant corporations, SMEs are much more likely to take risks and experiment with disruptive new ideas.

Creating Widespread Job Opportunities

• SMEs create a substantial portion of jobs across numerous countries globally.
• In the U.S., they employ nearly half (46.4%) of the entire private sector workforce.
• Across the European Union, they provide over 100 million jobs in total.
• The World Bank Group estimates micro businesses generate about seven out of every ten formal jobs in developing economies.

Fueling Robust Economic Growth and Prosperity

• SMEs play a vital role in the share of overall GDP across diverse national economies.
• Small and medium enterprises comprise more than half (53%) of the total GDP across the European Union.
• In China, they remarkably account for over 60% of GDP and 50% of total tax revenue.
• For emerging economies, the World Bank estimates formal SMEs contribute up to 40% of GDP

A Regional Snapshot of SME Significance:

Promoting Competition, Variety, and Consumer Choice

• Small business administration fosters a competitive and diverse business landscape by offering alternatives to large businesses.
• More variety propels excellent consumer choice, market efficiency, and economic balance.
• SMEs often cater to niche local markets or customized demands that large firms tend to overlook.

Key Challenges Faced by Small-Scale Enterprises Globally

Despite their vital importance, SMEs worldwide often need help with their growth and success. Some of the biggest challenges include:

Accessing Adequate SME Financing

• It's harder for SMEs to get approved for bank loans or attract investors than larger, more established businesses.
• The World Bank estimates that small businesses in developing countries yearly have over $5 trillion in unmet financing needs.
• When SMEs need more money, it limits their ability to invest in new projects, grow their operations, or survive economic downturns.

Dealing with Regulatory Burdens

• Most small and medium-sized businesses need more dedicated staff and expertise to properly manage their legal, tax, accounting, and other obligations.
• Compliance costs disproportionately impact and undermine the competitiveness of medium-sized companies.

Competing with Large Enterprises

• SMEs need help to compete with large businesses' vast operational scale and market dominance.
• To compete effectively with larger enterprises in a dynamic market, SMEs must navigate complex marketing, pricing, and distribution strategies. 
• More prominent corporate firms leverage monumental bargaining power over suppliers and customers.

Getting and Keeping Great Workers

Small and medium businesses often need help to keep outstanding workers.

They compete with big companies that tend to pay more, offer better benefits, and have more career advancement chances.

On the other hand, to lure great talents, small businesses must offer exceptional training, a cozy workplace, and cool extras - all within a specific budget restriction.

Government’s Efforts to Help SMEs

To help these small businesses, governments all across the globe have started different programs to support their economic potential and creative innovation, such as:

• Tax incentive programs and improved access to financial assistance
• Regulatory reform efforts with simplified compliance processes
• Providing advisory services and skills training opportunities
• Promoting entrepreneurship and supporting the launch of new SME businesses
• Facilitating partnerships between SMEs and more giant corporations

The Small and Medium Giants in the World Economy

In conclusion, SMEs may be categorized as "small" or "medium" in size, but their collective role is absolutely indispensable for driving the global economy forward. 

Though definitions vary, SMEs share this monumental impact worldwide:

1. Pioneering innovation across industries
2. Creating widespread employment opportunities
3. Fostering diverse, competitive business landscapes
4. Generating robust economic growth and national prosperity

By supporting SMEs, we can create a more inclusive and sustainable economic environment, which allows new ideas and small businesses to grow and succeed.

Governments can also create relevant regulations to support the growth of small and medium enterprises by rooting out their problems.

But having clear government regulations is not the only factor in growing an SME. There are plenty of things that businesses need to do independently, like enhancing the business process by implementing the ERP system.

Want to know whether your micro business needs an ERP system? 

Contact us now for transformative sales, customer relationships, and business process management.