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?

Almost three quarters (74%) of UK 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 UK small businesses told us they are positive, or more positive, about the future is that they:

• have more work available (42%)
• are making more sales (33%)
• have seen an improvement in cash flow (24%) 

The first two sentiments likely reflect the fact that the UK economy overall has performed better in 2024 than in 2023, when it spent part of the second half of the year in recession. The reported improvement in cash flow is most likely due to the ongoing downward trend in inflation. This in turn makes it easier to manage costs and eases the squeeze on profits and cash flow.

A smaller group of UK businesses (26%) said that they felt negative, more negative, or much more negative about their business than the previous month. This group is finding that:

• it’s harder to find new customers (55%)
• existing customers are buying less (45%)
• price rises are affecting sales (29%) 

These challenges reflect that, while inflation is lower, prices are still higher than a few years ago. This means cost-of-living pressures have not gone away, leaving some potential customers still dealing with stretched budgets. 

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 UK government policies

Already, in the first six months of the Starmer government, there have been multiple new policies for small businesses to get across. This includes business rates, National Insurance changes and plans to tackle late payments. With the publication of the modern industrial strategy, and a small business strategy due to be released in the coming months, we’ll no doubt hear more details about the Government’s plans for small-business-related policy.

UK small businesses are also likely to be keeping a close eye on the new Trump administration in the US. At this stage, it’s unclear how much of the campaign platform will be implemented in the first year of the Trump presidency. But any increase in tariffs on UK goods has the potential to negatively impact UK small businesses that export to the US. 

What can you do: To take advantage of new opportunities from policy change, and limit any potential negative impact, you’ll need to work with your advisors to have a good understanding about how each new policy announcement specifically impacts your business, supply chain, staff, and customers. Don’t wait until the policy has been brought in to respond; plan ahead and work with trusted advisors. 

Cash flow should benefit from lower inflation and interest rates

Higher than normal inflation, and the accompanying higher interest rates, have been challenging for 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 any cash flow pressures you’ve been dealing with.

The Bank of England has begun its rate-cutting cycle; the question now is, how quickly will rates be cut and to what level? This matters to small businesses like yours directly, as it increases how much you can borrow and/or reduces the cost of repayments. It also benefits you indirectly, due to the impact on your customers’ budgets as they have a little more to spend in your business. 

What can you do: Over three quarters of UK small businesses (80%) say they are yet to see the recent cuts to official interest rates resulting in more sales. As time goes by, more interest rate cuts are likely, as long as inflation follows the path the Bank of England currently expects. This means customers should start to have a little more cash available to spend in your business. Make sure you’re ready to respond with sufficient stock, enough staff, and additional marketing capacity. 

Productivity and digitalisation

Like many advanced economies, the UK has struggled to achieve productivity growth in recent years. The Office of National Statistics estimates labour productivity fell 1.8% year-on-year in the September quarter 2024. This makes the task of getting inflation back under control even harder. It also means the post-pandemic economic recovery has been more difficult, and is at least partly why the UK economy hardly grew in 2023. Small businesses will need to focus on productivity boosting levers in 2025. 

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 maximise 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 the UK are performing, check out the Xero Small Business Insights for the UK.

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 ︎

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