There has been some debate about the correct categorisation of SMEs in the G-Cloud sales data
SME definition, for the majority of companies is simple
This article explains the definition and how it is applied
It provides advice on what to do if you see a supplier holding-out to be in the wrong category
One of the longest running disputes in the G-Cloud sales discussion is over the accuracy of categorisation of SME vendors. Here I will show how Crown Commercial Service define SME, how the classification gets applied (and where it goes off the rails) and what we can do about it if we notice something that looks amiss.
SME definition Vs SME policy
Two issues are in danger of becoming conflated. The definition of SME and how it’s used and reported is relatively trivial. The policy for fostering and nurture of the SME economy is of vital importance:
At the end of the day we’re seeking a ‘win-win’ – more business to SMEs as an engine of the economy and better value for the good of the public purse.
We believe small businesses and social enterprises have a vital role to play in the growth of the UK economy and often they will be the most flexible, the quickest to respond and the most imaginative.
SMEs create intellectual capital
Future prosperity along with contributions to the lofty concepts of security, sovereignty and self determination depend, from my perspective, on fostering and nurturing the SME foundation of the economy. In particular, I look to the innovators which add to the UK’s stock of intellectual capital; a prized and hard-earned asset that is an engine of the country’s earning potential in future years. I don’t knock investment in physical capital: broadband, roads, factories – these are also engines of future earnings potential, but the constantly evolving nature of intellectual capital seems to leave today’s socio-political establishment perpetually on the back foot. Legislation, regulation and practice on things like tax, labour, privacy, international trade is too much hard-wired to an industrial past era. This also seems to be true of many politicians and bureaucrats (and the educational syllabus), hard-wired to yesterday, awkwardly ham-fisted today, a danger to tomorrow.
But this article is about the simple definition and use of the term SME in the Digital Marketplace and where it has some problems.
I have found contradictory definitions of SME and the classifications of Micro/Small/Medium enterprise in the EU regulations, but this is the one adopted by CCS and GDS for the purposes of the Digital Marketplace: SME Definition. To examine it in any depth you need to look at The User Guide to the SME Definition and to understand the accounting principles, wade through Directive 2013/34 which astonishingly has a different definition of SME to the source definition we are citing. But ignore that conflict and just use the latter to understand what they mean by “Balance sheet total”, or accept my having done the detective work for you.
Classification of Micro, Small & Medium Enterprise
This is obligatory. From your last statutory financial period end, what was the average number of staff (counting employees, not contractors, neither apprentices or people on maternity leave and apportioning part-time workers). 249 or under to go to the next teat.
Choose Turnover or Balance Sheet
A vendor can choose whichever test they are more likely to pass. For a SaaS company this is likely to depend on whether the balance sheet is heavy with Goodwill from acquisitions or capitalised development. If not, SME SaaS balance sheets are normally fairly small. The total asset test does not allow the offset of current liabilities or accruals from current assets. So the traditional window-dressing at the year-end may bloat assets and push a company over the threshold. Turnover is normally straightforward and will come off the last financial statements. (Net of VAT and any rebates).
Which business entity do we apply the test to?
This is where the contention lies. The business entity tested is, in simple terms, the ultimate parent undertaking, wherever that is based. So a subsidiary in a U.S. group must use the parent consolidated accounts to perform the tests. There are rules obliging an enterprise to count all or a proportion of the relevant quantities (headcount, turnover, assets) if the enterprise has associates, partners or linked companies (starting with a 25% shareholding in or by another enterprise). If this applies to you – better go look at the guide, it’s too tedious to cover in detail here.
How is it applied in practice?
- CCS use D&B data to classify suppliers
- GDS initially take the classification a supplier puts on their G-Cloud application
Where do the errors come from?
Us, the suppliers who initially put the wrong data on the G-Cloud submission. As well as take-overs and other M&A activity during the course of a framework, or growth (there are some transitional allowances in the EU definition).
What can we do about errors?
Queries are routinely received by CCS from other parts of CCS, Government Departments and Wider Public Sector and any supplier or third party who wants to report it. CCS Commercial Intelligence Team will check the latest accounts and if necessary change the categorisation.
Looking at the “Unclassified” size category in the sales data, suppliers in this category account for (roughly) 10% of the volume of SaaS sales and represent (roughly) 10% of the number of SaaS suppliers with sales. It is fairly safe from an analysis perspective to consider these to all be “Large”. Meanwhile, if you notice an error has been made by a supplier self-certifying themselves to a category where they do not belong. Simply notify CCS and the issue will be resolved in due course.