Small Businesses and the NAICS

In the 1930’s, the federal government developed and introduced the first U.S. system to classify business establishments based on type of primary business activity.  At that time, our economy was primarily driven by manufacturing.  This system was known as the Standard Industrial Classification (SIC) system and utilized a hierarchical four-digit coding system with ten major categories or sectors; thus many of us are familiar with the term SIC code.

By the 1990’s, economies all around the world had dramatically changed over the past sixty years and governments began discussing the need to make changes in their classification systems. The new structure, introduced in 1997, is also a hierarchical system that utilizes six-digit codes with twenty major categories or divisions; it’s called the North American Industry Classification System, or NAICS.  NAICS groups establishments together based on production processes and is compatible up to the five digit level with the systems used by Canada and Mexico.  Additionally, it’s compatible up to the two digit level with the International Standard Industrial Classification of All Economic Activities of the United Nations.

Now that you know a little about the background, let’s address why a basic understanding of the U.S. business classification system is important for a small business.

First of all, by researching business data using a standardized code, such as the NAICS code, one can find out how many businesses like yours are operating and where they are located.  As an example of a geographically congregated industry, you’re likely to find a high percentage of furniture manufacturers located in North Carolina.  Furthermore, these codes will be helpful in preparing your marketing plan as you need to be able to clearly describe your business, suppliers (if applicable), and competition.  If you operate in the B2B market, you can also use use an industry coding system when describing your target market(s).

Second, one can use this industry data to study trends of past activity to make estimates of what may happen industry-wise in the future.  As an example, if the government had been tracking blacksmiths or manufacturers of buggy whips, one would have noticed a continual decline in these industries.  Two modern examples are the decline we’re seeing in the number of video-rental stores and independent travel agencies.

Third, one can use industry data to compare and contrast basic characteristics within your industry, such as employment (size of business) and full and part-time employment levels.  By visiting www.census.gov you’ll obtain a quick overview of the types of business and industry surveys and reports made available by the U.S. government. 

Fourth, a NAICS code is necessary for a wide range of documents.  Federal and state entities ranging from the U.S. Environmental Protection Agency, the IRS and the Census Bureau will require a business to provide their NAICS code on many of their applications and reports.  Other practical uses include attorneys filing required government documents, banks evaluating loan applications, insurance companies accessing risks and mailing list publishers compiling business data. 

If you’re familiar with the old SIC system given below, you’ll recognize carryover to the new system. The ten categories of the older SIC system are:

  1.  Agriculture, Forestry and Fishing
  2. Mining
  3. Construction
  4. Manufacturing
  5. Transportation, Communications and Public Utilities
  6. Wholesale Trade
  7. Retail Trade
  8. Finance, Insurance and Real Estate
  9. Services
  10. Public Administration 

The twenty categories and the corresponding first level two-digit codes of the newer NAICS system are: 

  • 11         Agriculture, Forestry, Fishing and Hunting
  • 21         Mining, Quarrying, and Oil and Gas Extraction
  • 22         Utilities
  • 23         Construction
  • 31-33    Manufacturing
  • 42         Wholesale Trade
  • 44-45    Retail Trade
  • 48-49    Transportation and Warehousing
  • 51         Information
  • 52         Finance and Insurance
  • 53         Real Estate and Rental and Leasing
  • 54         Professional, Scientific, and Technical Services
  • 55         Management of Companies and Enterprises
  • 56         Administrative and Support and Waste Management and Remediation Services
  • 61         Educational Services
  • 62         Health Care and Social Assistance
  • 71         Arts, Entertainment, and Recreation
  • 72         Accommodation and Food Services
  • 81         Other Services (except Public Administration)
  • 92         Public Administration

For those of you who live in the greater Southlake, Texas area, here are highlights by industry (utilizing NAICS divisions) of businesses in this market as published in the 2005 County Business Patterns.  In 2005, 4,563 establishments were reported in the greater Southlake market based on a compilation of data for the seven zip codes in this market.  Roughly 14.7 percent of all businesses were involved in Retail Trade, 13.5 percent were involved in Professional, Scientific and Technical Services and 9.4 percent were classified in the Health Care and Social Assistance division.

If you would like to learn more about using NAICS codes to make your marketing efforts more profitable, please contact Kate Barlow at KGB Strategic Marketing Solutions.