As 2024 came to a close, Xero surveyed small business owners to find out how they were feeling, what was driving their positive or negative outlook, and how recent interest rate cuts had impacted their business.¹ As Xero’s economist, I’ve reviewed the results and dusted off my crystal ball to bring you my thoughts on what your business is likely to be facing in 2025 and how you can prepare.

How are small businesses feeling as 2024 ends?

In Canada, 84% of respondents said they were either still positive, more positive, or much more positive about their business than they were in the previous month. 

The top three reasons Canadian small businesses told us they are positive about the future is that they:

• are making more sales (41%)
• have more work available (40%)
• have seen an improvement in cash flow (29%) 

The first two sentiments are consistent with recent commentary from the Bank of Canada that consumer spending is starting to pick up, even though overall GDP growth was soft in the second half of the year. The reported improvement in cash flow is most likely due to the ongoing downward trend in inflation that has been underway in Canada. This in turn makes it easier to manage costs and eases the squeeze on profits and cash flow.

What are the big macro trends in 2025 and how can you benefit from them?

Every year unexpected events happen, and it’s likely 2025 will be no different. Nevertheless, the macro trends that you, as a small business owner, accountant or bookkeeper, need to stay aware of can be grouped into three broad categories: government policies, central bank actions and productivity. With the right strategy you can turn these big trends, over which small businesses have little control, to your advantage.

New government policies

Canada must go to the polls before October 2025, but the exact timing of the election is unknown at this stage and won’t be clear until a new Liberal leader is selected and parliament resumes on March 24. Canadian small businesses are also likely to be closely watching the actions of the new Trump presidency. The most significant proposed new policy measure that could impact Canadian small businesses is higher tariffs on Canadian goods exported to the US. It will be important for small businesses to stay across the potential flurry of activity arising from both the changing Canadian political landscape and the new US administration.

What can you do: To take advantage of new opportunities, and limit any potential negative impact, you’ll need to remain focused on your business objectives. Working with your advisors, aim to have a good understanding of how any new election-related policy announcements will specifically impact your business, supply chain, staff and customers.

Cash flow pressures should start to ease as inflation returns to target and the Bank of Canada’s rate cuts flow through to small business customers

Higher than normal inflation and the accompanying higher interest rates inflicted a lot of pain on many small businesses over the last two-to-three years. These forces drove up costs, hurt customer spending, and squeezed profits and cash flow. A period of price stability and lower interest rates in 2025 should help ease these cash flow pressures. 

Bank of Canada rate cuts matter to small businesses for two reasons. Firstly, it increases how much they can borrow and/or reduces the cost of their repayments. Secondly, there are indirect benefits from their customers, who themselves should have a bit extra cash to spend in small businesses. 

What can you do: Four in five Canadian small businesses (80%) say they are yet to see the recent cuts to official interest rates resulting in more sales. Interest rate cuts, including the more recent one in December, should start to flow through to benefit small business sales more in 2025.  

Productivity and digitalization

Like many advanced economies, Canada has struggled to achieve productivity growth post-pandemic. Statistics Canada estimates labour productivity fell 0.4% quarter-over-quarter in the September quarter 2024, and was down in seven of the eight previous quarters. This means the post-pandemic economic recovery has been more difficult in Canada than the US, where productivity growth has been much stronger.

What can you do: If you can boost your business productivity then you’ll be able to do some combination of offering lower prices to customers, attracting more skilled staff through higher wages, or lifting the profitability of your business. Think about how you could use digital tools, including those powered by AI, to complete those low-value tasks that take time but don’t bring in sales. Review the processes your business uses to make sure you’re operating in the best way possible, not just a way you’ve always done something. Invest in your staff so that they can maximize the benefit of new technology or processes.  

Get more small business insights

If you’re interested in finding out more about how small businesses in Canada are performing, check out the Xero Small Business Insights for Canada.

1.  All figures, unless otherwise stated, are from an online survey commissioned by Xero in November 2024. Responses are from small businesses in Australia (300), Canada (250), New Zealand (154), UK (600) and US (290) during November 2024. Options have been edited for readability. ︎

The post What’s ahead for your business in 2025? appeared first on Xero Blog.