Updated: Oct 17, 2022
In one episode I got a little technical with the founder of Burnside Knives. I know, I am sorry, but I promised my listeners I would try and teach you all something. So here goes nothing. Today we will talk about North American Industry Classification System, also known as NAICS.
Oh, a jolt of forgetting my locker code just hit me.
Ok back to education: what is NAICS? What is it important? And why should an entrepreneur care?
NAICS is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.
So, when you think of manufacturing, NAICS thinks of sector 31-33 of the NAICS digital code. And it gets very specific.
For example: manufacturing food for humans, code 311, is not the same as manufacturing food for animals, code 3111. But manufacturing dog and cat food, code 311111, is not the same as manufacturing other animal food, code 3111119.
And therefore, NAICS was developed under the Office of Management and Budget (OMB), and adopted in 1997 to replace the Standard Industrial Classification (SIC) system. It was developed jointly by the U.S., Canada, and Mexico, to allow for a high level of comparability in business statistics among the North American countries.
The key here is this was established to compare business statics across North America. Now why is this important, especially to an entrepreneur?
Because companies also rely on the NAICS code to classify their own customers by industry. Many target their own marketing efforts to businesses within a particular NAICS Code, including entrepreneurs. NAICS Codes allow an entrepreneur to focus efforts on companies in similar or identical industries.
By acquiring NAICS Information, one can gain a better understanding of their best customers and the industries that might best benefit from their products and services.
Every business you will start will need a NAICS code, which also creates a bit of an issue. As an entrepreneur, try to avoid high risk NAICS codes: automotive sales, the travel industry, restaurants, real estate. These NAICS are considered high-risk because success in these industries is difficult.
There are also high-risk industries that are subject to sticker underwriting guidelines, such as computer and software related services, general contractors, gasoline stations or convenient stories.
Choosing the incorrect NAICS code could end up costing the business money, but there are some benefits: federal contract for Small Business Administration (SBA) certified businesses, incentive programs and tax incentives to various industries, lending services (remember high-risk = higher interest rates), and other benefits.
As an entrepreneur it is important to know NAICS codes. It will help understand the market you plan to enter, who the competitors may be in that industry and other important insight.
So, what you are waiting for: grab yourself a glass of something to drink, pull-up a chair and start searching the NACIS database in an industry you are interested in.
Who knows – it may help spur the next entrepreneurial idea!