“NAICS” stands for the North American Industry Classification System. The NAICS system is one of the most widely used approaches to industry classification in the United States.
Created by the Federal Statistical Agencies in collaboration with Canadian and Mexican authorities, the NAICS was adopted by most American government agencies in 1997. The NAICS code was designed to reflect more modern industries and offer a standardized way to collect, manage, analyze, and publish industry data.
Companies assign themselves one or more NAICS codes. This industry code serves a variety of uses, including applying for government contracts and receiving tax incentives. (As with any rule, there are exceptions. Some government agencies, like the Occupational Safety and Health Administration and the U.S. Environmental Protection Agency, assign NAICS codes for environmental purposes; in these cases, the NAICS code isn’t entirely self-assigned.)
For those looking to leverage industry data in 2021, the NAICS code may not offer enough granularity or specificity. The NAICS system is more detailed and modern than the older SIC (Standard Industry Classification) system it replaced. However, as economies have evolved, the NAICS code, too, struggles to reflect new realities. Other industry classification systems have emerged to capture the reality of contemporary business.
One such system is the GICS, or Global Industry Classification Standard, used by financial institutions and systems globally. It’s an eight-digit classification system with two codes for each of the following designations (in order): sector, industry group, industry, and sub-industry. This unique structure offers more accuracy and granularity than the NAICS, but it sometimes fails to capture the broader picture.
Small business lenders rely heavily on industry data for insights about how a business operates and generates revenue. Imperfect as they are, industry classifications such as the NAICS and others can help small business lenders understand their business customers. Industry types can be used to benchmark revenue and growth, understand risk exposure, detect fraud, and identify future sales opportunities.
Why is industry classification so challenging when it comes to small businesses especially? Read more on the Enigma Blog.
