Xero's Small Business Index is based on anonymised and aggregated data from hundreds of thousands of small businesses. In the UK, it fell to its lowest point (84 points) in July since February 2021. The Index is now showing a clear downward trend from the post-2020 recession high of 99 points set in October 2021.

Shrinking sales

Although small business sales rose 4.5 percent year-on-year (y/y) in July, this is down from 6.1% y/y growth in June and well down from the 20.8 percent y/y growth in May. 

Stripping out price impacts using the July ONS Consumer Price Index (CPIH) of 8.8% y/y, sales growth last month was due to price rises rather than small businesses selling more goods or services, with sales volumes falling 4.3% y/y.  

The softness in sales was felt particularly strongly by small businesses in the retail sector, which saw sales fall by 6.9% y/y as rising costs put a squeeze on consumer spending. Only small businesses operating in the information, media and telecommunications sector (+9.6% y/y), administrative support (+13.3% y/y) and rental, hiring and real estate (+9.0% y/y) had faster nominal sales growth than inflation.

Jo Copestake, UK Sales Director, Xero, said: “It’s a challenging time for many small businesses across the country, especially for independent retailers who’ve experienced another significant decline in sales. This month’s figures suggest that consumers have less disposable income to spend, which is not surprising given the headlines we’ve seen about inflation and increases in the cost of living such as energy prices.”

Late payments continue to hurt small businesses

The Index also revealed that the average wait time for small businesses time to be paid rose by 0.4 days to 30.4 days. This is the fourth consecutive monthly rise in this measure, taking the average time for a payment to be made 1.6 days above the 2021 average of 28.8 days. On average, payments to small businesses by their suppliers were made 8.3 days late in July, which was 0.7 days longer than June. 

According to another recent Xero survey of large organisations, late payments offenders can no longer plead ignorance – more than 3 in 4 (78%) admitted they are aware they are paying their suppliers late and understand the impact it can have.

“It’s disappointing to see that many small firms are not being paid the money they’re owed on time,” continued Jo. “Most large businesses are fully aware of how delays in payments can impact their suppliers, limiting their ability to pay for bills, resources and staff. We’ve been advocating for some time now that we move away from calling this ‘late payments’, which legitimises poor practice and lacks urgency. It should instead be called ‘unapproved debt’ to highlight that this is a conscious hoarding of money that is owed to small businesses.”

Jobs market remains weak, despite rise in wages

Despite an increase in wages of 4.8% y/y growth, small business jobs fell by 4.5 percent y/y – the same decline as in the year to June 2022. Offering higher wages to compete for staff is putting more pressure on small businesses, which can’t afford additional costs in the context of declining real sales and further delays to payment times.

The two weakest sectors were once again manufacturing (-8.6% y/y) and construction (-8.9% y/y). Administrative and support services (+1.4% y/y) was the only sector where there were more jobs than in July 2021.  

While London continued to record positive jobs growth (+3.1% y/y), the lead-up to hosting the Commonwealth Games in August did not help the West Midlands jobs market, which recorded the largest fall in jobs of any region (-6.7% y/y).