Sales are continuing to improve at small businesses, but cash flow remains under pressure, according to a new report.
Xero's
The XSBI report also found sales grew 4.0% year over year in the second quarter of 2026, a gradual improvement from 3.5% in Q1 2026 and 2.1% in Q4 of 2025, but remained below the long-term average of 5.4% year over year.
Monthly trends suggest elevated fuel prices and broader household cost pressures weighed on discretionary spending, with sales slowing from 5.2% in March to 2.6% in May before rebounding to 4.8% in June as fuel prices eased. Sales growth slowed to 4.6% year over year in April and then to just 2.6% in May. Hopes for a ceasefire in June, even a temporary one, saw retail gasoline prices dip slightly. That freed up some willingness for spending and small business sales picked up again, growing 4.8% year over year in June.
Higher operating costs and cautious consumer spending continue to pressure margins despite improving sales.
"The headline economy and the small business economy are increasingly telling different stories," said Xero economist Louise Southall in a statement. "While AI investment is helping drive broader economic growth, many small businesses continue to face higher costs, cautious consumer spending and tighter cash flow. That's why operational data like sales and payment trends provides a clearer view of conditions on Main Street."
While late payments improved by 0.5 days to 8.5 days, businesses waited longer to be paid overall, with the average payment time increasing from 28.6 days in Q1 to 29.3 days in Q2. The data suggests businesses may have extended invoice payment terms, delaying when cash ultimately reached small businesses.
"For small business owners, the truest economic indicator isnʼt a headline about the economy, itʼs the state of their cash flow," said Xero U.S. CEO Matan Bar in a statement. "This quarterʼs insights tells us that sales are improving, but many businesses are still contending with longer payment terms, rising costs and uneven conditions nationwide."
For the first time the report included state-level data for 17 states and the combined region of Maryland, Virginia and the District of Columbia. This data, which goes back to January 2019, showed significant differences in small business performance across the country. In Q2, sales growth was led by the grouping of Maryland, Virginia and the District of Columbia (up 7.8% year over year), New York (up 7.6%) and Delaware (up 7.1%).
In contrast, sales fell during the quarter in Utah (down 4.5% year over year) and were only just higher than a year ago in Washington (up 0.3%) and Ohio (up 0.7%). The Utah result stood out because it differs from the rest of the country, and from Utah's usual performance. All three months of the quarter recorded lower sales than a year ago. Xero plans to closely track Utah's small business performance in the coming months to see if this softness is temporary.
