How much do you know about the North American Industry Classification System (NAICS)? If you’re like a lot of business owners, chances are, not much.
Here is a short overview of the system and how to navigate it:

What is NAICS?

The North American Classification System was introduced to essentially replace the older method, Standard Industrial Classification (SIC). Developed in the 1930’s, SIC was the go-to method of industry classification. However, it has recently been overshadowed by NAICS because of frequent criticism that the SIC process has proved unable to handle the rapid current economic change.
NAICS assigns a code to a business to correspond with their economic activity. This system breaks down into twenty industry sectors. For small businesses, these codes are typically used for contracting and tax purposes.
As the SBA states on its website, a NAICS code is comprised of six digits. The first two indicating your economic sector, the third your industry subsector, the fourth corresponding to your industry group, the fifth referring to your industry and the sixth denotes if an establishment is specific to the US, Canada or Mexico.

Why is it Relevant to You?

Potential applications of the NAICS knowledge include:

• Statistical analysis
• Risk assessment for insurance
• Tax incentives
• B2B
• Benchmarking
The NAICS is can play a substantial role in the life of a small business. One application of these codes is by the government to generate statistics for analysis to aid research. When applying for business insurance, an agency will likely use your NAICS code when assessing risk and generating rates. High-risk industries require different action. In addition, some federal and state agencies require an establishment to have a NAICS code for tax reasons and occasionally tax breaks are given to businesses in specific industries. If you work with a company that has B2B (business to business) arrangement with other companies, you can use the NAICS code to glean important information about prospective customers. In short, it is a system of industry categorization that could be used for a wide range of analytical purposes. Take benchmarking for instance; as a business owner, you may be interested in determining how your financial statements compare with that of your peers. It is important to at least have a marginal understanding of the NAICS code system before setting out on your benchmarking quest.

How can you place your company within NAICS?

For instance, you run a software publishing firm and need to determine your NAICS code. Publishing is within the “Information” economic sector, thus NAICS 51. This economic sector includes Publishing Industries (NAICS 511), but also includes Motion Picture and Sound Recording Industries (NAICS 512), Broadcasting (NAICS 515), Telecommunications (NAICS 51), Internet Service Providers (NAICS 518), and more. If benchmarking and looking for financial data and trends from firms in our example industry, we need to refine our NAICS code to the six-digit level. Let us follow the three-digit Industry Subsector of NAICS 511 for Publishing Industries.
Within Publishing Industries, the four-digit Industry Group reveals two industries: Newspaper, Periodical, Book, and Directory Publishers (NAICS 5111), and Software Publishers (NAICS 5112). This particular industry does not break down into any further segments so the five-digit Industry code takes on a single “one” showing NAICS 51121. Likewise, if there were several types of Software Publishers within the NAICS code system, they would correspond with a fifth digit as 1, 2, 3, and so on. Lastly, the six-digit U.S. National Industry code for our sample industry is NAICS 511210 Software Publishers, as no further breakdowns exist.

Learn more

A wonderful source for searching NAICS codes and learning their structure and descriptions is the U.S. Census Bureau’s NAICS website at http://www.census.gov/eos/www/naics/. In addition, FINTEL offers its own resource for researching the NAICS system linked with its Industry Metrics tool. Happy searching!

This entry was posted on Friday, December 2nd, 2011 at 1:58 pm and is filed under Basics, Business Intelligence, Financial Ratios, Industry Analysis, USA Economy, financial intelligence, industry metrics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.