Xero’s Small Business Index, based on anonymised and aggregated data from hundreds of thousands of small businesses, fell to 85 points – its lowest reading so far this year.

After seeing the first jobs growth of the year in June, a further boost of 0.8% year-on-year (y/y) across the last three months marked four months of consecutive employment gains for small businesses. While the North West (+3.7% y/y) and London (+2.5% y/y) showed the strongest growth, Wales (-3.5% y/y) and East Midlands (-1.9% y/y) still saw a decline in employment.

Sales slow into Autumn

This employment boost was overshadowed by stagnant sales growth in the last three months. Sales rose just 1.1% y/y in September, and 2.1% y/y across the three months, a stark fall from June’s 8.9% rise and an average of 7.3% y/y in the first half of 2023. Using the September CPI as a proxy for prices, sales actually fell 4.3% in the three months to September.

Sectors most dependent on discretionary spending were most impacted over the last quarter. Retailers showed the largest decline (-2.4% y/y) in sales in the three months to September, with education and training falling by 0.2% y/y after rising 8.6% y/y in the first half of the year. Small businesses in Wales and the North East of England showed the flattest sales trajectory, growing just 0.3% y/y and 1% y/y respectively.

Alex von Schirmeister, UK Managing Director, Xero, said: “While we’re seeing an encouraging trend of jobs growth for small businesses, slowing sales growth - especially during the busier summer months - illustrates how difficult the climate is for UK small businesses. We all need to shop ‘small’ and support our local firms as they enter a tough winter, against a backdrop of inflation and rising costs.”

Late payments hit three-year high

On average, small businesses waited 29.4 days to be paid by their customers in the three months to September, which is 0.5 days longer than the average across the first half of 2023. This metric has continued to rise over recent years.

But the late payment times are particularly concerning, with small businesses paid 7.7 days late in September – the highest level in three years. This dragged up the three-month average to 7.1 days late, which is longer than in the first half of 2023 (6.4 days). More monthly data will be needed to understand if this is a firm trend. Small businesses in the manufacturing sector were paid the latest in the three months to September, at an average of 10.1 days late.

“It’s completely unacceptable that late payment times are back to where they were three years ago. When businesses are paid late, it is harder for them to pay their own bills and manage their cash flow let alone invest in growth,” continued von Schirmeister. “We need to see this late payments data trending down, and we hope the full output of the UK Government’s Late Payments Review will bring positive change.”