Digital adoption key to small business productivity gains

Xero data reveals that small business labor productivity is matching national levels, but it remains below pre-pandemic averages.

The report, Small business productivity: Trends, implications and strategies, is based on anonymised and aggregated data from more than 240,000 Xero small business customers and looks at the current state of small business labour productivity across Australia, New Zealand and the UK. 

A key finding of the report was that small business productivity growth, as measured by the XSBI data, is equal to or higher than national level productivity growth. This suggests that this group of small businesses are keeping up with their big business counterparts when it comes to productivity growth. 

Louise Southall, Xero Economist, said: “As the main contributor to both GDP and employment, big businesses tend to have a strong influence on national level productivity, making it a reasonable proxy for big business productivity.” 

For Australia, the report also found: 

● Productivity (adjusted for inflation) was generally between $100/hour and $104/hour in the three years prior to the pandemic 

● Temporary business closures and disruptions saw it plunge as low as $89.90/hour in May 2020 ● The most recent peak of productivity was reached in November 2022 at $110.40/hour ● In December 2023, productivity fell to $100.30/hour, which is at the lower end of the pre-pandemic range 

“Xeroʼs data shows thereʼs been a distinct slowdown in productivity over the past year. This decline was likely driven by both a soer sales performance and, with the labour market still tight, small businesses wanting to keep the staff they’ve trained to avoid the skills shortages they had post-pandemic. This has likely put pressure on already struggling small businesses, making it harder to increase profits, li wages for staff and to keep prices low for customers. At the economy level the productivity decline is likely adding to inflationary pressures, and limiting economic growth,” Southall said. 

The report found that small business productivity growth, as measured by the XSBI data, tends to be equal to or higher than national level productivity growth and this was consistent across all three regions. 

“The finding that small business productivity growth is equal to or higher than national productivity growth is unusual. A key reason that the results depart from other studies is most likely the make-up of the XSBI sample. All the small businesses in this data set use digital technology to help them run their business. This highlights how powerful digital adoption can be in boosting productivity,” Southall said. 

Comparing country productivity puts Australia in the middle 

For the majority of the time from January 2017 to December 2023, New Zealand small businesses had the highest productivity of the three countries, followed by Australia and the UK. This contrasts the latest OECD’s national level productivity report, which ranks Australia ahead, followed by the UK and then New Zealand. The different rankings are likely due to differences in methodology, with the XSBI series measuring productivity for wage-earners only and the OECD measuring productivity for all employed. 

Anthony Drury, Managing Director ANZ, Xero, said: “Small businesses are known as the engine room of our economy, and for very good reason. They work hard, they are our nationʼs biggest employer, and they drive connection in our communities. But Xeroʼs report shows that, since the pandemic, itʼs getting harder to create the same amount of value for hours worked. We need small businesses to work smarter, not harder, and one action to improve productivity is to digitalise. Government can play a crucial role here by ensuring there are targeted incentives for businesses to digitalise and enabling them to embrace technology to drive efficiency. By liing small businesses up, we can strengthen the economy overall.” 

Productivity guide for small businesses 

For tips on how small businesses can li their own productivity, Xero has put together a guide. This includes four key areas for a small business and their advisors to think about: 

● Buying better work tools (or capital) to amplify the efforts of workers 

● Developing smarter processes or methods of working 

● Upskilling workers 

● Using entrepreneurship skills to not just start a business but also make sure it is operating at its full potential 

This new XSBI productivity data supports conversations on productivity due to its sole focus on small businesses, speed to market and monthly measurement cadence, and objective, anonymised, aggregated data. Other productivity data is generally broader, slower to be released and covers a longer period of time (e.g. quarterly or annual). You can find a copy of the report here. 

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