Advertisement
  1. Business
  2. Small Business
Business

What Is a Small Business? And Why the Size Definition Matters

by
Difficulty:BeginnerLength:MediumLanguages:

We often talk about small businesses here on Envato Tuts+. But what exactly is a small business?

It seems simple, but actually there are quite a few definitions floating around out there, and a “small business” can range from a solo web entrepreneur all the way up to a multi-million-dollar business.

Why Small Business Size Definition Matters
How small is a small business? (graphic)

Why does it matter? Well, when you’re lumping such different types of companies into the same small business definition, it can lead to a lot of confusion. You might read an article that you think is aimed at you, when in fact the author’s advice is designed for much larger companies and won’t work for your business. The definition can also affect things like government policies and loan programs for small business.

So in this tutorial, I’ll aim to bring some clarity to the question of small business size. First, I’ll cover some official definitions, from the U.S. Small Business Administration and others. Then, I’ll look at some alternative definitions, and I’ll clarify what we mean by a small business when we use the term here on Envato Tuts+.

Finally, I’ll explain in detail why the definition matters, and what the implications are for your business. And I’ll give you some tips on successfully navigating those different definitions and making sure you always get the right information for your business.

So if you’re ready, let’s dive right into those definitions!

1. What Is a Small Business?

OK, let’s break the term “small business” down. The “business” part of the definition is pretty simple. Basically, if you’re providing goods or services to customers, you’re a business. You don’t have to be set up as a corporation, partnership or any other type of legal entity; sole proprietors are a type of business as well. If you’re in business, you’re a business.

The trouble comes when we try to define “small”. What qualifies as “small”? How do we measure it?

Usually, the size definition is based on either the number of employees or the amount of money you make, or perhaps both. Sometimes, it's also based on the size of the assets on the company’s balance sheet.

Here are some examples of how that works.

United Kingdom

A small company is defined in the UK's Companies Act 2006 as one with:

  • annual revenue of no more than £6.5 million
  • a balance sheet total of no more than £3.26 million
  • no more than 50 employees

A company needs to meet all three standards to qualify. But, as you can see, the levels are pretty high for what most of us would think of as “small”. That’ll be a recurring theme...

Australia

In Australia, there are a few different definitions used by different government agencies. The Australian Securities & Investments Commission defines a “small proprietary company” as one with two out of these three characteristics:

  • annual revenue of less than $25 million
  • fewer than 50 employees at the end of the financial year
  • consolidated gross assets of less than $12.5 million at the end of the financial year

The Australian Taxation Office bases the definition on revenue only, with a threshold of $2 million. Fair Work Australia bases it on staff: a small business has fewer than 15 employees.

These definitions are in Australian dollars, but they’re still pretty high, right?

United States

In the U.S., things are a little more complicated. The U.S. Small Business Administration uses revenue and/or number of employees to define a small business, but it applies different standards in different industries, so it produces a huge, 46-page table of size standards for various types of firms.

The definitions can vary quite a bit. Most farms qualify as small businesses if they make less than $750,000 a year. But for graphic design services, the standard is ten times higher: $7.5 million. It can even vary within industries: if you’re a caterer, the limit is $7.5 million, but for a “food service contractor”, it’s a whopping $38.5 million. And some definitions are based on number of employees only—often with limits of 1,000 employees or even higher.

Gartner Research

Lots of research and consulting firms do surveys or other research on small businesses—or sometimes small and midsize businesses (SMBs). Their definitions are pretty large too. Here’s Gartner’s definition of an SMB:

“The attribute used most often is number of employees; small businesses are usually defined as organizations with fewer than 100 employees; midsize enterprises are those organizations with 100 to 999 employees. The second most popular attribute used to define the SMB market is annual revenue: small business is usually defined as organizations with less than $50 million in annual revenue; midsize enterprise is defined as organizations that make more than $50 million, but less than $1 billion in annual revenue.”

Wait a Minute!

You may be thinking: “Hold on! Those aren’t small businesses. A thousand employees, and millions of dollars of revenue? Those are the big guys.”

I agree. That was my reaction too. From the perspective of huge government organizations or corporations, a few million dollars may seem “small”. But to the rest of us, these definitions don’t make much sense. If I ask you to think of a small business, I very much doubt that you’ll think of multi-million-dollar companies. You’ll probably think of a small shop or office with a number of employees that you can count on your fingers and revenue that you can count from what’s left in the till at the end of the day. 

So in the next section, I’ll explain what we mean when we talk about “small businesses” here at Envato Tuts+.

2. The Envato Tuts+ View

In the Business section here at Envato Tuts+, most of our tutorials are aimed at people who own or work in a small business—and those who aspire to do so.

When we think of a small business, we don’t think millions of dollars and thousands of employees either. So most of our tutorials are aimed at truly small small businesses. Generally that means companies with between one and five people. Some people call a company of this size a microbusiness.

Does that mean that if your company employs six people, our advice won’t apply? Of course not. We’re not the government, and we don’t make laws or dispense small business loans (unfortunately), so we don’t need strict lines in the sand. In fact, many of our tutorials can also apply to slightly larger businesses—say up to 20 people. And we also have tutorials specifically aimed at high-growth startups.

We don’t really define our audience in terms of the dollar amount they’re making, but we do write tutorials for companies that are in the early stages of trying to start, run, and grow their business. So revenue would likely be measured in thousands rather than millions.

So that’s our view of small businesses. But why does it even matter? I touched on the reasons in the introduction, but let’s look at that question in more detail in the next section.

3. Why Does the Size Definition Matter?

The small business size definition matters because whenever you mix very different types of things into the same bucket, you get dubious results.

Think of it in terms of personal finance. The kind of advice that works for millionaires simply won’t work for someone who’s just graduated from college with a ton of student debt, and vice versa. The two people have vastly different situations and different needs. The recent college grad will need help with budgeting and debt management, while the millionaire wants to know about things like the best investment opportunities and how to set up complex trusts to minimize tax.

It’s the same with businesses. If you’re a truly small business, with perhaps no employees other than yourself, your needs are very different from those of an established company that employs dozens of people and makes millions. Some things are universal, but most things aren’t.

So you need to evaluate everything you read very carefully. As I’m writing this, a couple of new small business surveys have been released in the last couple of days. A Wells Fargo survey shows that small business optimism is up, and a Bank of America survey shows that women small business owners are more optimistic than men about the revenue and growth outlook.

But read the small print, and you’ll see that Wells Fargo thinks a small business has “annual revenues up to $20 million”, and Bank of America goes for “annual revenue between $100,000 and $4,999,999 and employing between 2 and 99 employees”.

Unfortunately, policy makers pay attention to surveys like this. They use them to find out what small businesses are experiencing and to decide what policies to set. They may think: “Great! Small business optimism is up, so they’re doing well—we don’t need to give them any more tax breaks.” But a lot of companies included in the survey are what most of us would call at least medium-sized and probably even large companies. Their experiences may bear little relation to those of a true mom-and-pop store.

The size definitions are also often used to decide who qualifies for government small business loans or other funding. So you might go for the funding for your business and be surprised to find yourself competing with much larger companies. You might find it hard to qualify for those small business loans, because you don’t have the financial track record that the more established companies can show.

So the size definition matters in several different ways. In the next section, we’ll talk about what you can do to avoid the confusion and make sure you get the right advice for your business and your situation.

4. Understand What's Right for Your Own Business

Given the hugely divergent small business definitions out there, it’s important to take generic small business advice with a pinch of salt, unless you're clear on what the author or the site means by "small business". Otherwise, you might be basing your business decisions on what’s right for a much larger company, not for you.

It’s a good idea to do a little analysis of yourself and your business, so that you understand what’s right for you. These questions are a good starting point:

  • What are your goals?
  • How do you define success?
  • Are you aiming for high growth or sustainability?
  • How comfortable are you with taking risks?
  • Are you willing to take on debt to fund the growth of your business, or do you prefer to live within your means?
  • Would you consider outside investment, or do you want to maintain total control?

There’s plenty more you can do to understand your business and your goals more clearly. Check the following tutorials for more information:

When you’ve got clear about your business’s main value proposition and set some goals and objectives, you’ll be in a better position to analyse the advice and articles you see online. Use the information you’ve gathered in this self-analysis process as the lens through which to view “small business advice” from now on. And watch closely to see if you can find the size definition that the authors are using.

Conclusion

As you’ve seen, what we’re talking about when we talk about small businesses can vary widely. If you’re not clear on the size definitions being used, you could end up following advice intended for completely different types of company.

In this tutorial, you’ve seen how various governments and other entities define a “small business”, and you’ve seen how we define it here at Envato Tuts+. You’ve also seen why the small business definition matters, and how you can get clearer about your own business goals so that you can make sure any advice you read is appropriate for you and your business.

If you’ve seen any other definitions out there, or if you have your own definition of a small business, please do share them in the comments.

Advertisement
Advertisement
Looking for something to help kick start your next project?
Envato Market has a range of items for sale to help get you started.