What Makes a Business "Small"?
Forster-Holt, Nancy, Strategic Finance
In trying to come up with one definition of small business, IMA's Small Business Financial and Regulatory Affairs Committee decided it needed to include all companies "small enough" to warrant its advocacy.
The newly established Small Business Financial and Regulatory Affairs Committee (SBFRAC) of the Institute of Management Accountants (IMA[R]) recently set out to define "small business" so that Committee members would have a clear understanding of what companies and individuals the SBFRAC exists to serve. As a member of the Committee, I'd like to share with you the story of how we determined what a small business is for our purposes.
Background of the SBFRAC
The Committee was formed in early 2008 to enhance the overall quality, usefulness, logic, flow, and cost effectiveness of financial reporting for smaller businesses. All Committee members are IMA members who work for, own, study, or provide professional services to smaller businesses.
We attempt to ensure that the concerns of smaller businesses are considered in the development of financial standards, laws, rules, and regulations. The Committee's advocacy activities are focused on providing comments and insight on proposals, research studies, and pending legislation set forth by a variety of domestic and international organizations. In particular, the SBFRAC works to minimize compliance burdens on smaller businesses and to challenge a one-size-fits-all approach to standards setting and rule making.
One "Small" Doesn't Fit All
When the Committee first met in March 2008, a question that we discussed and expected to answer during the meeting was "What do we mean by 'small' business?" At first glance, this seemed like a straightforward task--maybe even a little too easy--because we were aware of several existing definitions of small business. But as the discussion proceeded, we found the existing definitions that we reviewed to be unsatisfactory.
In particular, we considered several quantitative definitions of small business, including ones based on number of employees, total assets, market capitalization, and annual revenues. We also considered using the number of employees in the finance function as a possible measure of "smallness." For example, many businesses have a CFO, yet others have an OFO (only financial officer). But we quickly realized that we were really looking for a definition that was inclusive rather than exclusive so as to avoid arbitrarily closing the door on any business that could benefit from our advocacy. And because many of IMA's approximately 60,000 members work for or with smaller businesses, we wanted to make sure that our definition would resonate with those who consider their companies "small enough" to warrant advocacy by the SBFRAC on their behalf.
Ultimately, we rejected all definitions of "small" that incorporated "bright-line" quantitative thresholds, such as those used by the U.S. Small Business Administration (SBA) and Internal Revenue Service (IRS). We concluded that relying on such definitions wouldn't be consistent with our goal of inclusiveness.
Additionally, the Committee discussed statistics indicating that nearly all small businesses are privately owned and that nearly all privately owned businesses are "small," which raised the question of whether it would be appropriate for the SBFRAC to resolve the big-vs.-small issue simply by choosing to focus its attention on privately owned companies rather than publicly owned companies. After much discussion, the Committee rejected using private vs. …