Key insights into small business performance in 2022

While many hoped 2022 would be a year of recalibrating and regaining some certainty, it instead brought more change that small businesses have had to adapt to. 

We’ve been talking to our customers throughout the year, gathering information on how they’re feeling, how their business is performing, and the key challenges they are facing. Thanks to Xero’s Small Business Insights (XSBI) program, we’re able to get real data which, combined with these anecdotes, gives us a reliable picture of the small business economy each month.

In the XSBI program, we use anonymised and aggregated data to track the performance of, and improve understanding about, small businesses. We release monthly data from New Zealand, Australia and the UK, and quarterly data on the US and Canada. 

Finding and keeping staff

For the first three months of the year, the biggest challenge for small businesses was finding people to fill vacancies amongst a shrinking pool of available staff. Spikes in COVID-19 cases and isolation requirements resulted in fewer people being able to work. In Australia and New Zealand, some industries, such as agriculture, faced skills shortages as international borders in both countries had been closed to new migrants.

Despite the challenging environment, small businesses experienced steady sales growth, but were held back by not being able to find enough staff to support increased sales. 

In March, we saw the competitive job market driving wage rises in New Zealand, Australia and the UK. Many small businesses were having to pay higher wages to secure staff, which combined with price increases and supply issues, added increased financial pressure.

The impact of inflation on small business

The data for April indicated the early impact of the rising cost of living which affected consumers’ capacity to spend, resulting in a slowdown in sales across New Zealand, Australia and the UK. 

Adjusting to this environment of high inflation and its impacts on customers’ spending power has remained the dominant theme in the data for the second half of the year. Across New Zealand, Australia, the UK, the US and Canada, sales have been trending slower during 2022 as customers find themselves with less to spend once they’ve paid their rent/mortgage, groceries, household bills and transport.

Cash flow remains the number one challenge

As businesses are dealing with the aftermath of the pandemic and the rise in inflation, many are experiencing severe cash flow challenges. Negative cash flow can lead to mounting expenses, unpaid wages, lost jobs, and owners dipping into personal savings to keep their business afloat. 

In July, we released a special report examining cash flow challenges facing small businesses, including worryingly high figures. The data revealed more than 9 in 10 small businesses face at least one month of negative cash flow a year, and many suffer for several months each year. The report found that on average, small businesses are cash flow negative for 4.2 months in Australia, 4.5 months in the United Kingdom and 4.0 months in New Zealand.

These findings reinforce the need for small businesses to work with their advisor to understand the reasons for their cash flow stress. Part two of this report, released in September, identified three early warning indicators that small businesses and their advisors need to be looking out for to ensure they stay on top of cash flow management. 

These red flags are:

• late payments
• rising expenses 
• seasonal slowdowns

This research note takes a deeper dive into late payments trends, including an international comparison. Analysis of the data across all five countries shows late payments have become more volatile since early 2020. This makes it even more difficult for small businesses to predict when they will get paid, which makes cash flow planning more challenging.

This blog outlines some steps small businesses and their advisors can take to help manage cash flow especially in times of volatility and uncertainty. 

Expanding XSBI into the US and Canada

At Xerocon New Orleans in August, we announced the expansion of our XSBI program to include quarterly data on the state of small business in the US and Canada. We released a special report that provides insights into business performance and the impact of inflation on US and Canadian small businesses. 

The report focuses on the metrics of sales, time to be paid, and late payments, and offers a global comparison of small business sales growth across the five countries in the XSBI program. After experiencing sharp downturns during the pandemic, all five countries made a return to positive sales growth during 2020, but some countries recovered faster than others. 

Preparing for 2023

This year has indicated that change is going to continue. With this in mind going into 2023, it’s important for small businesses to be embedding resilience strategies into all areas of the business. There are three key areas I encourage you to focus on:

1. Visionary leadership

Be clear on your vision, stay focused on your purpose and values, and allow them to guide your decisions. This can help you stay the course even in the face of challenge and disruption.

2. Business focus

Working with an accountant or bookkeeper, look at how your business has changed over the last 12 months and identify new risks you need to plan and adjust for. This may also involve looking at consumer behaviour changes to ensure you are continuing to meet your customer needs.

3. Culture of resilience

Try and view change as a positive. Every change is an opportunity for learning, creativity, and efficiency. Use data and technology to feel confident with the decisions you make to adapt to change. 

Building these strategies into your business will help your business better cope with challenges that arise, because as they say, change is the only constant. Being ready to embrace change and being flexible in an ambiguous environment will help you best serve your customers and achieve your goals in 2023.

To see the latest data from November 2022, check out the following updates:

• Global data
• New Zealand data
• Australia data
• UK data

Visit xero.com/xerosbi for more information about the Xero Small Business Insights program.