Business Advice

What Is An SME? SMEs Explained

Allison S Robinson | 17 August 2022 | 2 years ago

What is an SME?

If you’ve ever wondered what an SME is, then this article will explain it all. An SME is a small to medium sized enterprise.

In the UK, an SME is defined as a business with fewer than 250 employees with a turnover of less than £50,000,000.

These types of businesses are considered to be the backbone of the economy with 99.9% of the nation’s business population being SMEs and employing over 60% of the country’s workforce.

SMEs are typically family-owned and operated businesses that are passed down from generation to generation and whilst they are often the heart and soul of their communities, providing employment and economic stability, the way they are classified can vary by country.

Read on for an overview of SMEs including exactly what they are, what makes them successful and how you can join the ranks. 

What Factors Determines SME status?

Several factors determine SME status in the UK but perhaps the most important factor is employee headcount. To qualify as an SME, a company must have fewer than 250 employees. This limit includes full-time, part-time, and temporary workers, but does not include freelance or contract workers.

Other important factors include turnover, balance sheet total, and that they are independent businesses that are not majority owned or controlled by another company. Currently, to qualify as an SME, a company must have a turnover of less than £50 million and a balance sheet total of less than £43 million. These limits are reviewed on an ongoing basis to ensure that they remain relevant and up to date.

Benefits of SME Status?

SME status is important because first and foremost, it allows companies to access a range of government support and funding programmes that are not available to larger businesses. This can be essential for start-ups and early-stage businesses that need all the help they can get. In addition, SMEs often benefit from reduced tax rates and simplified reporting requirements. This can save businesses a considerable amount of time and money. Finally, being classified as an SME can help businesses to build their brand and reputation; customers and clients often perceive SMEs as being more trustworthy and down-to-earth

Why Are SMEs Important?

SMEs are vital to the economic health of any country. They are often the backbone of communities, providing economic growth, job creation, and innovation. SMEs make up 99.9% of all businesses in the UK and employ over 60% of the workforce.

SMEs are also important because they are typically family-owned and operated businesses that are passed down from generation to generation. This means that they often have a lot of history and roots in their communities. As a result, they tend to be more invested in the well-being of their community than larger businesses.

What Makes A Successful SME?

Growth concept - tree in hands

One of the most important factors in building a successful SME is having a clear and achievable business plan that supports a great service or product. This will help you to map out your goals and objectives and make sure that you are on track to achieve them.

A successful SME is also one that can adapt and grow with the changing needs of the market. In today’s business environment, that means being able to operate effectively in a global market. To do that, companies need a strong online presence, be able to reach new customer segments through digital marketing, and use data analytics to make informed decisions about where to focus their energies.

Business owners also need to be agile and able to respond quickly to customer feedback and new developments in their industry. It is important to always be learning and evolving. The world of business is constantly changing so it is important to stay up-to-date with new trends and developments. This will help you to stay ahead of the competition and make sure that you are always moving forward.

It is also important to have a strong team in place. Surround yourself with people who share your vision and who are passionate about what you do. This includes staff, key partners, suppliers, and other stakeholders. This will help to create a strong culture within your organisation and support it to give you the best chance of success.

Of course, every business is different, and there is no single formula for success, but the three elements listed above are essential for any company that wants to thrive in today’s competitive marketplace. If you can build a business with a great product or service, a dedicated team, and sound financial management, you’ll be well on your way to SME success.

How Can I Start An SME?

Starting an SME is a big decision but it can be a very rewarding experience. The first thing you will need is a great business idea and a business plan that includes your goals, your budget including known expenses and funding needed, and your marketing strategy. 

To register your business, you will need to decide on the right business structure and this will depend on the size and scope of your business. (see the options available later in this article). 

If you will be taking on staff, you will need to assemble a team of people who share your vision, then you need to get the word out about your business. Marketing is essential for any business but it is especially important for SMEs.

You need to make sure that people know who you are and what you do. The best way to do this is to create a strong online presence. Make sure you have a website and that you are active on social media. You should also consider traditional marketing methods, such as advertising and PR. With the right marketing strategy, you can make sure that your SME is a success.

What Are The Different Types Of SMEs?

business man reviewing business charts

There are many different types of SMEs in the UK. The most common are sole proprietorship (also referred to as sole traders or self-employment), partnerships, limited companies and franchises. 

Sole proprietorships are the simplest type of business structure and are typically owned and operated by a single person. A sole proprietor has full control over the business and can make all decisions without approval from others. However, sole proprietorships also have some disadvantages, such as unlimited personal liability. This means that if the business fails, the owner is legally responsible for all debts and can lose personal assets such as their home or car. 

Partnerships are similar to sole proprietorships but involve two or more people. Partners share decision-making authority and are each personally liable for the debts of the business. Limited partnerships offer some protection from personal liability, as only the general partners are held responsible for debts. 

Limited companies are a more complex business structure but offer some advantages over sole proprietorships and partnerships, such as protection from personal liability. Limited companies can be either private or public, and share many similarities with partnerships. However, shareholders in a limited company are not personally liable for the debts of the business. This offers them some protection if the business

The right business structure for you and your business will depend on several factors including its size, growth potential, annual turnover and how many staff you have. It’s important to speak to an accountant or lawyer to get expert advice on which business structure is right for you when setting up a new business.

SME Support & Guidance Available

Whilst SMEs are the lifeblood of many economies, providing jobs, innovation and competition, they can be vulnerable, and in need of support. Fortunately, there is a range of programs and initiatives available to help them succeed wherever your SME is based.

In the UK, SMEs have a wealth of support and guidance available to them from the government on topics like business rates, tax relief, and grants. In addition, there are dedicated large-scale organisations including the Confederation of British Industry (CBI), the Federation of Small Businesses (FSB), and the British Chambers of Commerce (BCC) that offer advice and support to businesses of all sizes to help them start up, grow, and succeed. 

In the EU, the European Commission has created the SME Instrument, which provides funding and mentoring support to small businesses with high growth potential. In the US, the Small Business Administration (SBA) offers a range of programs and services to support small businesses.

SME Challenges

Every business faces challenges, but small and medium-sized businesses (SMEs) often have a unique set of obstacles to overcome. Accessing capital, taxation, red tape, attracting and retaining talent, and competing with larger businesses can all be major challenges for SMEs.

  • Accessing capital can be difficult because banks can be reluctant to lend money to small businesses. This can make it difficult for SMEs to invest in new products or expand their operations.
  • In the UK SMEs income is taxed at a rate of 20%. This rate applies to companies with an annual turnover of less than £85,000 and they also need to be aware of corporation tax, National Insurance contributions and Value Added Tax (VAT). In addition, some other taxes may apply depending on the business activities undertaken, such as Stamp Duty Land Tax and Capital Gains Tax. The amount of tax that a business needs to pay will vary depending on its size, structure and profits but business owners must ensure they know the rules and comply to avoid penalties.
  • The huge variety of regulations covering everything from employment law, health and safety, to environmental protection that SMEs must adhere to, and can be seen as red tape. A recent survey found that SMEs spend an average of 40 hours a month on regulatory compliance at a cost of £12,000 per year. These are significant costs in time and money which all restrict the output of innovation, new products and services that small businesses can work on.
  • Attracting and retaining talent can also be a challenge, as small businesses may not be able to offer the same salary or benefits as larger businesses, or have the same brand recognition power. This may result in a limit to the skills they can harness in their workforce or the training that they can offer. 
  • SMEs tend to be heavily reliant on personal relationships, which whilst strong personal connections can make it easier to build trust and win customers, can also create a vulnerable business model if key relationships are severed. 
  • Competing with larger companies that have greater economies of scale can be tough for SMEs. For example, large businesses can offer lower prices due to the volumes that they can manufacture and process which can make it difficult for SMEs to compete and survive in a price-focused marketplace.

Overcoming The Challenges

Whilst these challenges won’t apply to all SMEs, they are worth being aware of if you are thinking of setting up your own business as they can be daunting. The good news is, that with the right mindset and understanding of the challenges that exist, there are plenty of ways to overcome these potential hurdles to SME success. For example;

  • SMEs can look for alternative sources of funding, such as venture capitalists or government grants. The organisations can also focus on creating a strong corporate culture and offering competitive salaries and benefits.
  • The government has put in place many measures to help small businesses, including grants, loans, and tax relief. There are also plenty of private sector initiatives that can offer advice and assistance. A dedicated helpline for businesses that need advice and support is available from the government and can be reached on 0300 456 3565.
  • SMEs are eligible for tax relief, which can reduce their tax liability. For example, the Annual Investment Allowance allows SMEs to deduct the cost of certain capital expenditures from their taxable profits. The Enterprise Investment Scheme provides tax relief for investment in qualifying start-up companies. And the Research and Development Tax Credit scheme offers a tax credit for companies that engage in research and development activities. These reliefs can make it easier for SMEs to grow and prosper.
  • In recent years, the UK government has taken steps to reduce the regulatory burden on SMEs. For example, it has introduced a streamlined process for approving new products and launched a consultation on simplifying employment law. As a result of these initiatives, SMEs are now better placed to compete in the global marketplace.
By understanding the challenges they face and taking steps to overcome them, SMEs can level the playing field and compete successfully against larger businesses.

Summary

SMEs are independent businesses that have less than 250 employees and less than £50 million in annual turnover in the UK.Whilst SMEs can face some challenges when trying to compete with larger businesses, there is plenty of support available for those determined to become thriving, successful business that is an important part of the economy and plays a vital role in communities across the globe.

Whether you already work for one of these organisations or want to set up your own SME, we hope this article has given you plenty of useful information so you understand exactly what an SME is.

 

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