Australian small businesses finished 2025 with their best sales and hiring growth in two years, according to the latest data from Xero.

However, just as things are starting to look up, February’s interest rate hike from the Reserve Bank of Australia could put the brakes on that momentum.

The latest Xero Small Business Insights report, based on data from more than 520,000 small businesses, shows the sector picked up speed in the final months of 2025. Sales jumped 6.7 per cent year-on-year in the December quarter – the strongest result since mid-2023 – while employment rose 3.4 per cent.

Xero economist Louise Southall said it had been a hard-won recovery.

“Small businesses worked hard to find their footing in late 2025, reaching sales and employment levels we haven’t seen in two years,” Southall said.

“However the February cash rate hike is a reminder of the fragile environment these owners operate in. As the RBA moves to address rising inflation again, the momentum we saw in December will be tested.”

2025 finished strong

December capped off a solid quarter, with sales up 9.6 per cent compared to the previous year, that’s the biggest monthly rise since early 2024. The lift has been partly credited to earlier rate cuts in 2025, which helped ease pressure on household budgets and encouraged spending.

Growth wasn’t evenly spread, though. Construction (+9.5 per cent), health care (+9.3 per cent) and real estate (+8.6 per cent) led the pack, while retail (+4.7 per cent) and hospitality (+3.5 per cent) lagged behind the national average.

Retailers in particular had a mixed run over the crucial pre-Christmas period.

“Black Friday is fast becoming the biggest sales moment of the year, but our data shows smaller retailers aren’t necessarily winning from it,” the report noted, with November sales growth slowing to just 3.3 per cent.

The figures suggest discounting may be driving sales volume without delivering much extra profit – a familiar story for small operators competing with big chains.

Small biz picking up more staff

Stronger sales gave many owners the confidence to take on staff, with employment growth reaching its highest level in two years. Construction and health care businesses led hiring, with jobs up 5.3 per cent and 5.7 per cent respectively. Hospitality barely moved, with jobs growth of just 0.1 per cent.

Wage growth came in at 2.0 per cent for the quarter, although Xero says that figure is likely to be revised upwards due to delayed reporting over the holiday period.

Yes it’s pay day!

One bright spot for small business owners was cash flow, with invoice payment times hitting a record low of 23.9 days on average. That’s the fastest since Xero began tracking the data in 2017, but late payments are still a problem.

“Yes, we’re seeing the fastest payment times on record — but let’s be clear: small businesses are still being paid almost a week late,” said Angad Soin, Xero Managing Director ANZ and Global Chief Strategy Officer.

“That means they’re effectively financing their larger customers and, when you’re running on tight margins, being paid six or seven days late isn’t an inconvenience — it’s the difference between investing in growth and covering payroll.”

Soin said managing cash flow will only become more important as new obligations like Payday Super come into play.

“Cash flow discipline is becoming non-negotiable,” he said.

While 2025 ended on a positive note, the outlook is less certain. The February rate rise could squeeze household budgets again, making customers more cautious and putting pressure back on small business owners who were only just starting to see consistent growth.

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