UK small businesses recorded strong wage growth in August, but are still struggling to hire the right talent, according to the latest data from Xero, the global small business platform.

Xero's Small Business Index is based on anonymised and aggregated data from hundreds of thousands of small businesses. The latest monthly data revealed the Index rose 2 points to 88 due to higher wage growth across the country.

Wages increased by 4.7 percent year-on-year (y/y) in August 2022, with the largest gains recorded in the hospitality sector at 5.7 percent y/y, the strongest wage growth of any sector in the past 11 months. The smallest wage rises were in rental, hiring and real estate (3.9% y/y growth).

Lack of available staff and late payments continue to hurt small businesses

Despite wage growth, small businesses are still struggling to attract talent back into the workplace. Jobs fell -5.3 percent y/y in August, which is the fifth consecutive month of declining jobs.

This decline in jobs is not driven by less demand amongst small businesses looking to hire, with the latest ONS labour market figures showing vacancies are still near record highs at 1.26 million between June and August 2022. It is due to a lack of available workers to fill small business jobs, with 642,000 fewer people in the labour market than before the pandemic in early 2020.

The Index also found that late payments rose 0.7 days to 30.5 days in August. This is the fifth consecutive rise in payment times. Small businesses were paid an average of 8.3 days late in August, which was 0.9 days longer than July. Failure to pay on time has a devastating impact on small businesses’ cash flow, and according to another recent Xero study, this is costing UK small businesses £684 million a year.

Alex von Schirmeister, UK Managing Director, Xero, said: “It's positive to see higher wages growth, but this doesn't seem to be translating into more jobs. This is leaving many small businesses short-staffed, with wages growth still failing to rise in-line with inflation. Coupled with another month of slow sales growth and the current economic instability, small businesses are feeling the squeeze.

Alex von Schirmeister, UK Managing Director

We need to see the government giving small firms the support they need to drive growth. This means tackling issues like late payments, which are having a devastating impact on cash flow, and also looking at ways to attract more people back into the workforce.

“It remains to be seen if the Chancellor's mini-budget will help small businesses with these issues in the longer-term. We need to see the government giving small firms the support they need to drive growth. This means tackling issues like late payments, which are having a devastating impact on cash flow, and also looking at ways to attract more people back into the workforce.”

Sales remain stagnant

Single-digit sales growth was recorded for the third consecutive month. Stripping out price impacts using the August ONS Consumer Price Index (CPIH) of 8.6 percent y/y, sales rose 8.5 percent y/y in August. With prices and inflation growing faster than this sales figure, this rise is being driven by higher prices rather than selling more goods or services.

For the first time in a year, the East of England (10.8% y/y) has overtaken London (+10.1% y/y) as the region with the strongest sales growth. Retail trade (-3.0% y/y) was the only sector to record a drop in sales. This was the third successive month of falling sales for this industry.

More information on the August metrics is available here.