Small firms continue to face a challenging macroeconomic environment, as sales growth in the December festive period hit a three-year low, according to the latest Xero Small Business Insights (XSBI) data from global small business platform Xero - which covers the three months to December 2023.

The current trading conditions are being added to by the growing cost of late payments for small businesses. According to new separate findings, this cost hit an estimated £1.6bn in 2023*, more than double the cost observed in 2021.

Stagnant sales cap off difficult 2023

Xero’s data revealed that small business sales revenue fell 1% year-on-year (y/y) in December - the first month of negative y/y growth since February 2021 - at a time when small businesses usually expect bumper sales. Across the final quarter of the year, sales grew just 1.6% y/y compared to a 9.7% increase in 2022, showing how weak festive trading was.

The weakest results were seen in the retail sector, where sales fell 1.7% y/y in November and 5.3% y/y in December (-2.2% y/y for the full quarter), when small retailers usually expect buoyant figures. This is the first period of consecutive monthly declines in retail spending since April and May 2020.

Scottish small business had a more encouraging sales result, bucking the national trend with a 4.1% y/y growth in the December quarter - the fourth consecutive quarter it has led the gains. In contrast, London-based firms saw the smallest sales increase over the last quarter (0.9% y/y), despite typically being a strong performing region.

Late payments remain a headache

The latest quarterly data shows small firms were paid, on average, 6.1 days late during the last three months of 2023. This figure shows no signs of improving, with the average payment still received over a working week beyond the agreed terms.

Separate analysis from Xero revealed the cost of late payments to UK small businesses rose to an estimated £1.6 billion in 2023. This figure, which is more than double the 2021 estimate, reflects the cost to the small business of not having access to the unpaid invoice funds and is in addition to what they are owed. The increase is largely due to rising interest rates and an increase in late payment times for those using small business suppliers.

Alex von Schirmeister, Managing Director UK & Emerging Markets, Xero, said: “Negative sales growth over the vital holiday period, as the UK officially falls into a recession, shows how difficult the situation is for small business, especially those in retail.

“The cost of late payments to small businesses has risen to an estimated £1.6 billion. That’s on top of what they are owed for their products and services. Let’s put an end to this unacceptable practice, which is drowning small firms, and call late payments what they are: ‘unapproved debt.’ That means holding big businesses accountable, so their smaller suppliers receive the money they are owed, on time.”

Small business wages growth slows

Wages paid by small businesses grew 3.2% y/y in the final quarter of the year, although only 2.6% y/y in the month of December, peaking in the hospitality sector (3.9% y/y). It is difficult for business owners to compete for talent against larger competitors, while keeping costs under control and remaining profitable. Wages (excluding bonuses) for all UK businesses rose 6.2% y/y in the same period, highlighting the challenges small firms currently face with hiring and growing.

When looking at jobs, small businesses continue to employ more people than a year ago - but growth is well below the pre-Covid average of 3.0% y/y.

Xero’s Small Business Index, part of XSBI, fell 13 points to 78 points in December. You can read the latest quarterly results here. To find out more about how the Index is constructed, see the methodology.

To coincide with this new data, Xero launched its Small Business Manifesto calling for greater support for small firms in key areas. This was launched today at a House of Commons event to celebrate small businesses and the community around them.