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How Small Businesses Should Navigate a Challenging Economy

3 Mins read

Small businesses constitute a major force in the U.S. economy, accounting for more than 99.9% of all businesses and employing approximately 60 million people across the country. In addition to general contributions to the overall U.S. economy and jobs created, small businesses also drive innovation and have a considerable economic impact at the local level. Despite the benefits to the economy and workforce, there are currently few data sets and reports that analyze small business economic conditions, making it difficult for policymakers, researchers and advisors to formulate an accurate understanding of how different policies and economic forces are impacting small businesses.

Xero, a global cloud-based accounting software platform, recently released its Xero Small Business Insights report, which provides three-monthly updates on the economic performance of U.S. small businesses, utilizing aggregated and anonymized data from hundreds of thousands of customers. The report provides a snapshot of  several core performance metrics, including sales growth, the amount of time businesses are waiting to get paid and how late payments are being received.

Sales Growth & Impact of Inflation

As inflation continues to rise, it becomes especially important for small businesses to focus on their profit margins and the impact of their customers’ declining spending power. The report found that while small business sales growth seemed to be nearly double the pre-pandemic average in March 2022, this was largely due to higher prices, rather than an increase in the number of goods or services being sold. Sales growth in March 2022 was +11.3% y/y – but with inflation rising to 8.5%, that means the real sales growth was actually just 2.8%.

So, essentially, much of small business sales growth was likely due to inflation and price increases – and not an increase in actual sales. Sales growth is one of the most prominent factors in determining the health of a small business and the overall small business economy, so small business owners need to recognize the impact inflation may be having on their sales projections and data.

In order to navigate current economic conditions , small business owners should have a pulse check on their cash flow to ensure all invoices and payments are being made on time. One solution to managing the cash flow of a small business is investing in cloud-based accounting software, like Xero. The software allows small businesses to record and keep track of their financial transactions in real time through its user-friendly interface. Often, cloud-based accounting software solutions allow for app integrations, which provide more scalability and customization for small businesses, depending on their needs and services.

Additionally, small businesses should establish clear payment terms and invoice promptly after delivering a good or service can also help a small business’ cash flow. In addition , small business owners should review all expenses to determine if there are any areas to cut back on.

Payment Times – How to avoid financial stress

Payment times are a vital puzzle piece to the overall cash flow of an organization. If a small business is waiting longer to be paid, it may experience periods of high financial stress, especially in situations where its own expenses aren’t flexible. Favorably, the Xero Small Business Insights report revealed that small businesses waited an average of 23.5 days for invoices to be paid in March 2022, which was quicker than the 2021 average of 25 days.

Late payments can also provide a clear view into the cash flow health of small businesses, as it often becomes difficult to maintain financial success  when payments are not consistently on time. Small businesses who frequently receive late payments may find themselves in a position where they can’t pay their expenses on time, need to borrow money or use their own funds to cover business costs. The data shows in 2022, late payments reached an average of 5.6 days after averaging 7 days in 2021.

Providing clear payment schedules can help to align expectations and eliminate the need to send recurring reminders. In order to avoid late payments becoming a pattern, it’s important to have a conversation about the lateness and work towards a solution that benefits both the customer and the small business. An accountant working as a holistic advisor can typically provide advice on having these conversations and help develop the payment plan to propose to the customer, in addition to ensuring the small business is maintaining cash flow and profitability. Additionally, investing in digital solutions such as electronic invoicing processes and online payments to ensure that the payment process is running as efficiently as possible is another essential path to take.

As small businesses continue to navigate challenging economic conditions, it’s more important than ever for them to have a clear understanding of what is happening to their costs and profit margins. Working with a trusted advisor and investing in new technology to help track financial transactions in real time will benefit small businesses as they look to get in control of their finances, especially during periods of high inflation.

Louise Southall is an economist at Xero. She joined the company in mid-2020 as part of the Xero Small Business Insights (XSBI) team.

Louise has over 25 years of experience in economics and business advocacy working with multiple business organizations, councils, government agencies and charities. Louise’s work has covered a broad range of economic and business-related policy issues, membership projects and thought-leadership research.

She has a Master of Economics from Macquarie University and a Bachelor of Economics (hons) from the University of Newcastle.

Economy stock image by katjen/Shutterstock

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