Small businesses have long been the backbone of the American economy. In good times and bad, they’ve been there, creating jobs, innovating, and serving their local communities. So it’s no surprise that, when the country was hit with a pandemic, small businesses were among the first to bounce back. But do they really?
The recent Xero report stated that small businesses’ growth which seemed to be nearly double the pre-pandemic level was largely driven by inflation, not by increased goods/services sold.
It Is Inflation, Not Real Growth
Small business pandemic recovery is largely fuelled by inflation. The report explains that small business sales growth in March 2022 was 11.3% year-over-year(y/y). And pre-pandemic small business average growth was 6.7% y/y. You can easily assume that small businesses’ growth doubled the pre-pandemic level. But it is not true.
Inflation grew 8.5% y/y in March 2022, meaning the real growth was much slower 2.8% y/y, leaving out the price effect.
So if you have witnessed high sales growth in recent past months, don’t simply assume that you’re growing. It might be due to inflation.
Chris O’Neill, Chief Growth Officer, Xero, said,
In March 2022, the US was experiencing higher inflation than any other major economy. As borrowing costs rise, expenses increase, and customer dollars decline in purchasing power, it is more important than ever that small businesses get in control of their finances. Understanding exactly what is happening to their costs and profit margins at all times will help them better navigate this tricky period,
The report also noted that small business owners in the US started to get paid timely. This is a good sign because getting paid timely improves cash flow.
According to the Xero report, small business owners got their invoices paid in 23.5 days in March 2022, while they waited for 25 days to get paid in 2021.
With inflation continuing to rise, small business owners should be ready to brace for the impact of inflation. They can witness supply chain disruptions, shortage of materials, decreased consumer spending, increased overhead and inventory costs, and much more in the coming time.
Therefore, business owners should work closely with their accountants to navigate the tough time ahead.
O’Neill further commented,
It’s encouraging to see timely payments to US small businesses; naturally, this helps support cash flow, which is the lifeblood of any business. This could be, at least in part, due to increased use of electronic invoicing processes and online payments as more small businesses embrace digital solutions.However, small business owners should note that as inflation continues to rise over the remainder of the year, they need to stay on top of their accounts and work hand-in-hand with a trusted advisor to ensure they are maintaining cash flow and profitability.
About the Report
The report is based on aggregated and anonymized data from US and Canadian small business customers. Accenture prepared the report with the help of Xero. Click here to know more about the report.