The world of business comes complete with its own unique collection of terms, concepts and procedures, and both new and seasoned business owners may find that their knowledge is tested from time to time. Two of the terms and concepts that are often shrouded in a bit of mystery are SIC codes and NAICS codes. Though these two terms and the digits that define them are frequently at work in the background, they may get lost among the more overt terms that drive your business and its day-to-day existence.
So what are these terms and what do they mean to you? Quite simply, they are used to help add standard classification to businesses throughout North America and sometimes even further into the international space. However, to really solidify their role in your business, let’s take a look at their existence from creation to current day.
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The History of SIC Codes
In the early 1900s, the United States economy was growing and standardizing. Industries were no longer composed of a few establishments scattered across the United States; instead, multiple businesses were opening and operating under the umbrella of their main source of industrial income.
Originally, various government agencies across the United States would collect and analyze data using their own reporting systems. This lack of standardization would leave one agency’s work and analysis fairly useless to other parties that may be interested in or benefit from the same information. As one could imagine, this lack of uniformity would eventually create a bit of an analytical nightmare.
In the 1930’s, a solution came to fruition with the development of the Standard Industrial Classification (SIC) system which divided the economy into different industries. These SIC codes were then used to help classify establishments under the proper industrial group and to help agencies nationwide successfully collect and analyze data in a uniformed manner.
Each four-digit SIC codes follows a specific designation formula in which the first two digits identify the major industry under which the business or establishment earns the majority of their revenue (primary line of business). The third digit is used to further refine the classification by identifying the industry subgroup under which the establishment falls. Finally, the fourth digit is used to identify the specific industry sector in which the establishment operates.
Take, for example, the common breakfast staple, cereal. Cereal is a manufactured good which falls under the major industrial group 20 for Food and Kindred Products. Within that major group, 9 other food related groups exist including Meat Packing (201), Dairy Products (202), and Grain Mill Products (204). The Grain Mill Products subgroup includes a variety of more specific industry sectors including our example, Cereal Breakfast Foods (2043), as well as Dog and Cat Food (2047) and Flour and Other Grain mill Products (2041).
Major Group: 20 – Food and Kindred Products
Industry Group: 204 – Grain Mill Products
Industry Sector: 2043 – Cereal Breakfast Foods.
How are SIC Codes Used?
Aside from adding structure and clarity to an otherwise vast and multifaceted economy, SIC codes can function in the following ways:
- Segment markets for professional use or to identify key competitors in both public and private markets.
- Identify businesses or determine eligibility for government contracts
- Provide a clean cut way to collect, analyze and report economic metrics
- Used to successfully complete relevant forms and applications
Introduction of NAICS Codes
You may have noticed that the invention and use of SIC codes was focused on use in the United States. However, as the economy continued to grow, SIC codes faced several challenged. First and foremost, trade and economic expansion made it important to extend data collection and analysis into Mexico and Canada. Furthermore, as time went on, the amount and types of businesses changed, and overtime, not every specific segment was properly classified.
In response to these deficiencies present due to continued growth, the North American Industry Classification System (NAICS) was introduced in 1997. NAICS codes were then used to classify business establishments within the United States as well as Canada and Mexico.
Today, these 6-digit NAICS codes have largely replaced SIC codes due to their more flexible nature and their ability to expand and include additional major industry sectors. However, SIC codes are still used by some organizations and agencies, and you can still review the directory to find out which one best suits your business.
Similar to the formula for SICS codes, the first two digits of a NAICS code signifies the major group or sector of an establishment. The third number is then used to determine the subsector of the major group, followed by the fourth digit which is used to determine the industry group. The fifth digit identifies the specific industry type, and the sixth, or final number, is used to determine the industry by nation.
Using the breakfast cereal as an example, the code would be built as following:
Major group or sector: 31 – Manufacturing
Subsector: 331 – Food Manufacturing
Industry: 3112 Grain and Oilseed Milling
Specific Industry Type: 31123 – Breakfast Cereal Manufacturing
National Industry Type: 311230 – Breakfast Cereal Manufacturing in the United States
How are NAICS Codes Used Today?
NAICS codes are used in many of the same ways SIC codes can be used. However, because they the official code of the federal government and referred to on an international scale, you may find NAICS codes to be more common in your business life. Here are a few ways you can expect to use these codes:
- To assist the Department of Revenue for legislative purposes
- Extend government offered tax incentives
- Keep taxpayers within a specific industry sector informed of various changes to laws and other relevant changes or updates
- Utilized by the IRS for administrative purposes.
- The SBA uses these codes to categorize your business and identify a size standard to qualify you for loans or other government programs (e.g. government contracts)
Why it is important to check your SIC code or NAICS code
Some similar industries have wildly different size standards as determined by the SBA. For example, if you are classified as an insurance agency, you are only considered small if your annual receipts do not exceed $7.5M. If you are in fact a reinsurance carrier, you should be classified under a different code, for which the size standard is $38.5M. This could alter government contracts and programs for which you qualify.
Additionally, your NAICS or SIC code could help determine whether or not a lender will consider you for financing. Some lenders will not consider your loan application if your business is classified under a very high risk industry. When you apply for a loan, make sure your existing NAICS code doesn’t incorrectly classify you under a higher risk industry than the one you should be in.
How to Obtain an SIC Code or NAICS Code
Though the differences between NAICS and SIC codes may seem slight, they do represent a definitive shift that weighs heavily in favor of NAICS codes. However, even if this is the case, you may find that you need to utilize both at one point or another.
Fortunately, identifying your NAICS code or SIC code is something you can do by visiting by your scoreboards in the REPORTS tab of your Nav account. From there, you can view any of your full business credit reports to see both your NAICS and SIC codes. Then, check out what your SIC or NAICS codes means and what else it could be on SICcode.com.
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