Small businesses see sales decline

Small businesses are experiencing the weakest sales since 2020, according to a new report from accounting software developer Xero, despite signs of an improving economy.

Small business sales fell 7.7% year-over-year in June, after a 2.3% year-over-year decline in May and a 6.7% year-over-year decline in April, according to the report. 

The findings contrast with a strong report that came out Thursday from the U.S. Bureau of Economic Analysis on the gross domestic product. It found that real GDP increased at an annual rate of 4.9% in the third quarter of 2023, according to an "advance" estimate. In the second quarter, real GDP grew 2.1%. The bureau attributed the Q3 growth in GDP to increases in consumer spending and inventory investment. Imports also increased.

However, the Xero report found that sales volumes have been even weaker than usual, with data indicating that consumers and other businesses are not prioritizing small businesses for their spending. Using the U.S. consumer price index as a proxy for prices, sales volumes declined an average of 7.2% year over year in the first quarter and declined an average of 9.5% year over in the second quarter. Xero found small businesses waited an average of 27.6 days to be paid in the June quarter, down from 28.7 days in the three months to March. The June quarter result was 0.3 days longer than the 2022 average of 27.3 days. In June, invoices were paid to small businesses an average of 5.9 days late, which is three days shorter than the first five months of 2023. 

Angus Mordant/Bloomberg

Last month, Xero issued a separate report on cash flow at small businesses, based on a survey of 542 small businesses with up to 50 employees across the U.S. It found that 48% said inflation has impacted their cash flow in the past six months, and 44% expect inflation to have a similar impact over the next six months. When asked about the top short-term financial challenges small businesses have faced over the last 12 months, limited or inconsistent cash flow (40%) and no cash reserved for unforeseen challenges (29%) came out on top. Cash-flow issues also caused a number of consequences for small-business owners, including not being able to pay themselves (45%) and pay bills (22%). In addition, 17% were unsure if they could keep the business going. Over half of the respondents (58%) believe cash flow issues have negatively impacted their personal well-being over the past 12 months, with the top three impacts being stress (84%), anxiety (79%) and sleepless nights (64%). Small business owners have tried various strategies to stimulate revenue and cut costs over the last 12 months, including increasing prices (48%), reducing overhead (43%) and reducing marketing spend (34%).

Accountants can help small businesses deal with cash flow concerns. "This is where the advisor plays a really powerful role," said Ben Richmond, U.S. country manager at Xero. "These data points are scary for them and hit home. How do they change that? What we see from our really good advisors is helping small businesses understand how important actively managing cash flow is and looking ahead and starting to build scenarios. Most small-business owners are passionate about the services and products they deliver, but they are not really accountants or bookkeepers, and often not passionate about doing that work either. That's where we see the provision of client advisory services in the accounting profession going. Then we can have this relationship where we're having a conversation on what these numbers mean today and map out the worst and likely case scenarios to start to think about what levers we can pull if the business is trending down one of those paths, like cost lines we can tighten that up as soon. Let's make sure we're ahead of the curve on making sure the business has cash flow funded."