Small business trends 2021

A look at what businesses did in 2020, and what they’ll do more of in 2021.

Small businesses stared down some of the biggest and weirdest challenges they’ve ever faced in 2020. Experimentation and improvisation flowed fast, and with that came lots of lessons (and yes, a few bumps and bruises).

The business trends that emerged during the year were all about adaptation and resilience. Many of them worked, which is why we expect them to stick around into 2021.

In case you don’t know us, we’re Xero. This report is based on the experience of our 2.3 million small business subscribers. So jump in and see what we learned about emerging trends in business. (You can find out about the methodology we used here.)

1. Seeing into the future is hot right now

Cash flow forecasting shot to prominence early in 2020 and experts say it will remain a critical business trend in 2021.

A cash flow forecast plots projected income and expenses on a timeline to show when money shortages are coming. That ability to see around corners came in really handy in 2020, as revenues dipped and fixed costs stayed mostly fixed.

As a result, cash flow tools were the most-searched for item in Xero’s app marketplace in March and April. And small business accountants say they’ll stay in vogue for the foreseeable future.

Cash flow and strong forecasting carried business through 2020. Continuing this practice is paramount moving into 2021. We’ve learned we truly need to be prepared for anything.

ay Kimelman, The Digital CPA

Cash flow forecasts help businesses see what bills can be paid and which orders can be placed. It also highlights what outstanding invoices need to be chased. And if extra lending or credit is required, then it gives enough time to make those arrangements.

That’s not just helpful in a downturn. Businesses experience cash shortages all the time. In fact about 70% of business owners say they’ve experienced cash flow difficulties at some time (Xero, 2019, Needs Beyond Accounting). Which is why we’re picking cash flow forecasting to be a business trend for 2021 and beyond.

Taxes that have been deferred, and loans that have been taken, will begin to need to be repaid in 2021. Careful cash flow planning will be critical for business survival as well as for bringing some peace of mind and reassurance to business owners.

Pamela Phillips, de Jong Phillips

No one had a feeling that a worldwide pandemic was coming. It’s going to make planning a much bigger part of business management not only in 2020, but from now on.

Tate Henshaw, Arc Management

2. Rainy day funds are going to bulk up in 2021

Contingency became more than a line in a budget this year. It was the difference between survival and closure for some businesses.

Spare cash was used to transform operations, take sales online, buy new lines of inventory, or introduce extra health and safety measures. It helped other businesses ride out the drop in sales that happened when customers hunkered down at home.

Given that 70% of small businesses expected a decline in overall revenue for 2020 (in a study commissioned by Xero and conducted by Forrester Consulting, Oct 2020), those emergency funds will get a workout.

But not every business had the cash cushion they would have liked. That’s not surprising. It’s hard to sit on a pile of money. Small business owners generally prefer to put profits back to work in the form of capital investment or extra marketing.

However, events occasionally come along that remind us how important it is to have a rainy day fund. 2020 gave us that in spades.

Keeping access to working capital, whether it’s cash on hand or access to funds as in lines of credit, is of utmost importance.

Jay Kimelman, The Digital CPA

So if having a rainy day fund is to become a business trend, the natural question is – how big should it be? The precise amount is likely to depend on your specific business and industry but think months, not weeks.

We advise our clients to build a war chest to cover 1.5 to 2 months of expenses – and that’s worked well. Only one of the 600 businesses we work with has had to close due to the downturn.

James Devenny, Devenny Payne

As a rule of thumb, we suggest setting aside a minimum of four months business running costs

Pamela Phillips, de Jong Phillips

An accountant or bookkeeper can help you decide, based on your situation.

3. Business relationships will get a whole lot more love

Businesses relied a lot on the goodwill of suppliers, customers, and employees this year. They cut each other slack on bills, worked hard to fill orders, and rallied around peers and competitors alike. It was a nice reminder that there are people at the centre of all these transactions.

Kindness and goodwill aren’t very business-y sounding business trends. So we decided to ask just how important that stuff really is. The answers might just give you the warm fuzzies:

  • 93% of consumers say they’d buy more from (and recommend) a business that showed empathy toward the community.
  • 69% said they feel proud of local small businesses.

(Forrester study, 2020)

That goes to show why ‘support local’ became such a rallying cry when the economy took a turn early in the year.

Emotional intelligence is important. We cut customers slack on payments knowing we could work it out after this is over. It’s the same with finding ways to keep staff. Small businesses were much better at working through this than big businesses.

James Devenny, Devenny Payne

Almost a third of small businesses already felt their personal connection with locals gave them an edge over bigger competitors (Forrester study, 2020). Expect more businesses to figure that out when they look back at 2020. Being part of a community has a very real commercial benefit that can’t even be broken by a pandemic. Working hard on the personal side of relationships will be a business trend of the coming year.

Focusing on relationships is a winning proposition for everyone. We’re all human and we’re more likely to be generous, trusting and forgiving when we have a strong relationship with the people we’re transacting with.

Pamela Phillips, de Jong Phillips

I don’t think people realize the opportunities available for extending goodwill during this time period. The ability to forge meaningful lifelong relationships is within our control, even if it seems like not much else is.

Tate Henshaw, Arc Management

4. Remote working will become even more of a thing

Productivity hasn’t been tied to the workplace for a long time now. That business trend just got supercharged.

All sorts can be run online now, including office documentation (word processing and spreadsheets), time-recording and scheduling, accounting and finance, project management, and inventory management to name a few.

Businesses are increasingly likely to take advantage of these types of products. In early 2020, almost 50% said they planned to move IT to the cloud – up from 32% a year earlier (Forrester study, 2020).

The ability to stay productive from anywhere always sounded like a good idea. The events of 2020 proved it. Businesses that ran online systems did better through the economic upheaval.

Among Xero’s 2.3 million users, those that used:

  • at least one other business app suffered 12% less revenue loss than other businesses
  • five or more other business apps suffered 33% less revenue loss than other businesses

(Xero SBI, 2020)

I’ve been working from home since 2009. Everyone is learning what I’ve known for a long time… productivity can equal or surpass working in an office with the right management and people.

Tate Henshaw, Arc Management

I suspect we’ll see a move towards a hybrid way of working with many businesses supporting their team to work from home while keeping a scaled down office as a space to meet, share ideas, and build relationships.

Pamela Phillips, de Jong Phillips

The technology has been around for awhile, but cloud adoption makes the process easier. We’re starting to see businesses decrease or even drop their office footprint.

Jay Kimelman, The Digital CPA

5. Selling online will be all the rage… again

Yes, yes – ecommerce was the next big thing back in the early 2000s. But lots of businesses still didn’t have a huge need for it. That is until their customers got stranded at home.

During lockdown, up to 58% of customer spend happened online. And businesses said online sales accounted for 12% more revenue than normal (Forrester study, 2020).

The scramble to sell online was evident in the Xero app marketplace. Between April and July, Xero users searched heavily for ecommerce tools like Shopify, WooCommerce, Square and Stripe (Xero SBI, 2020).

Meanwhile, more than a quarter of businesses said online marketing was their main strategy for getting through the downturn.

We had an associate that was three years away from being an online business...but they brought it forward to this year. They could have lost the business otherwise. Instead, they were able to capture 30% of their usual revenue online.

James Devenny, Devenny Payne

Ecommerce was clearly a great way to reach customers during lockdown, but it could remain important afterwards. Many consumers have now been trained to shop online for certain items and they may not come back to physical stores like they used to.

That, combined with the fact that online shops are a lot easier to build than they used to be (think drag-and-drop), means we’re once again entering an age of ecommerce growth.

Online sellers haven been growing exponentially for the past few years. The ease of entry to ecommerce will keep it growing.

Jay Kimelman, The Digital CPA

6. Workplace flexibility is here to stay

Employees and employers made lots of sacrifices for each other in 2020. And they may just hold onto the lessons in empathy in 2021.

We already know that many small business owners give up holidays or dip into their own savings in order to make payroll. In return, employees give hours of dedicated service.

But that give and take went to another level in 2020 as employees were asked to work fewer hours and in some cases take on extra health and safety risks. In return, they often asked for time back to support family, friends and communities in need.

Along the way, the old-school work week – eight hours a day spent at the place of business – started to look irrelevant.

For most people, life doesn’t suit a nine-to-five routine. Flexible working is hugely valued. Whether that is for doing the school pick up, going out for a bike ride when the weather’s good, or spending a month working from New Zealand (as one of our team did last year). Well, why not? As an employer, that’s a relatively easy benefit to offer.

Pamela Phillips, de Jong Phillips

We have offered our team members the ability to flex their work hours, so they can ensure their family, children and educational needs are met. Most call it work-life balance, I call it work-life integration.

Jay Kimelman, The Digital CPA

The traditional structures of the work week, pay cycle and remuneration are decades old and have been steadily evolving anyway. The events of 2020 may accelerate that for a lot of workplaces.

7. Business continuity planning isn’t for the paranoid anymore

Business continuity plans were always the right thing to do, but who really had the time? Not many. Then March 2020 came around and suddenly lots of people started fitting it into their schedule. Google searches for ‘business continuity plan’ leapt 600% year on year.

As the name suggests, a business continuity plan is a set of strategies to help you power on through a disruption. That disruption might be the loss of a key customer or supplier; a fire, flood or recession; or, say, a global pandemic.

Business continuity planning sounds heavy, but business planning expert Sally Hennah has some recommendations to make it less daunting.

Use a template, because the framework helps you tick off things that might be missed in the middle of a crisis. Continuity planning is great for empowering people who are not naturally leaders. They can see what needs to be done and step up when others may be finding it more challenging.

Sally Hennah, Business Sorter

There are many examples of businesses who adapted quickly to what happened this year. Having a process for assessing and responding to a crisis can certainly help with that. That’s why continuity planning will probably stay top of mind for a while.

Although we can’t predict every possible scenario, a sound plan in case of a natural disaster, health issue or even death should be a part of every business plan moving forward.

Jay Kimelman, The Digital CPA

By the way, Sally Hennah helped us create a free business continuity planning template. Download the template for yourself.

8. ‘Pivot’ is the buzzword that will never end

A lot of emphasis will go on business resilience in 2021. That means having things like business continuity plans and rainy day funds in place – and it also means being ready to pivot.

Sick of that word? That’s fair enough. But it really just means being flexible and open to change. Businesses that reacted the quickest to the events of 2020 found ways to survive and even thrive into 2021.

Agile businesses, run by open-minded owners, were undoubtedly better able to adapt than those who held firmly on to what they have always done. That’s not to say all businesses were able to pivot. But if you look at those that did, you’ll find innovative and exciting new ideas that put them in a strong position for the future.

Pamela Phillips, de Jong Phillips

There were big headline-grabbing pivots, like the staging company that switched to making work-from-home desks, or the bakery that started churning out ‘bubble cakes.’ But a pivot doesn’t have to mean a complete change in direction. It can mean tweaking parts of the business, such as adding an online shop, offering delivery, picking up new inventory items, setting up remote working, or accepting new types of payments.

The pivot questions might be, do we work from home? can we operate with fewer staff? can we survive on lower sales? do we offer delivery? It all comes down to having a business continuity plan and knowing when to act.

Jay Kimelman, The Digital CPA

You can sit still and do nothing, but your business is just going to contract if you let the world take control. We had clients bring forward their plans and actually spend money when lockdown hit.

James Devenny, Devenny Payne

If your business is equipped to pivot away from a threat, it’s also able to pivot toward an opportunity. Sometimes you can do both at the same time. 2020 was a good reminder of the value of flexibility. The lessons learned will be valuable into 2021 and beyond.

9. Flexible payments have proven their worth

Lots of customers all round the world asked for mercy on their invoices this year. In the UK, for example, small businesses had to wait an extra seven days longer to be paid in May compared to February (Xero SBI, 2020).

The vendors in these transactions had little choice but to roll with the punches – by extending payment terms, accepting instalments, and offering new ways to pay.

You can make concessions and get a percentage of what you’re owed, or be hard and get 100% of nothing. Emotional intelligence is a big part of it. We’re all in this together.

James Devenny, Devenny Payne

Many started accepting credit card payments for the first time. In fact, credit card processing services became one of the hottest searches in the Xero app marketplace from February to July (Xero SBI, 2020).

On the plus side, this business trend allowed cash-strapped customers to pay vendors using bank credit. On the downside, vendors generally had to pay a 2% to 4% transaction fee to accept card payments. The quicker payment was clearly worth it to many.

This strategy doesn’t just speed up payments during tough times. As far back as 2017, invoices that offered convenient ‘pay now’ options via credit and bank card were paid 30% to 50% faster (Xero user data, 2017). So don’t be surprised if this business trend continues well after the recovery has kicked in.

10. Small business tech is on a roll

2021 will be a big year for doing business from a distance. And that means it will be a big year for tech.

Businesses are hurrying to move IT services to the cloud, so employees can work from home. And they’re moving sales online, so customers can shop from home.

Xero watches technology trends in business through our app marketplace. In it, we’ve seen big spikes in searches for:

  • ecommerce tools for setting up online shops
  • payment services for accepting credit cards (and other forms of online payment)
  • cash flow management tools
  • inventory management apps

Meanwhile 50% of small businesses said they planned to move IT to the cloud when we asked in early 2020 (Forrester study, 2020).

It’s clear that small businesses think online tools like these will make them more resilient to socio-economic upheavals like the one we’ve just had. And they’re right. Xero users who were using at least one other business app when COVID-19 hit suffered 12% less revenue loss through the crisis than other businesses (if they were using five or more apps, the losses were 33% less).

We expect to see more of the same in 2021. Working flexibly, selling online, and connecting virtually are business trends that are, in many ways, just getting started.

Many businesses have pivoted to new tools and technology that allow them to rapidly serve customers or sell products online, access finance, or retain key talent. While we’re still in a period of upheaval, there’s positive opportunity for innovation as people adapt to new ways of working.

Nick Houldsworth, Executive General Manager Ecosystem, Xero

How do we know this stuff?

Xero is used by 2.3 million small businesses in 180 countries. We based this small business trends report on their experiences.

Specifically, data came from these surveys and reports:

  • Xero 2019 – Needs Beyond Accounting: Small business survey
  • Xero SBI, 2020 – Pandemic Insights: Small Business Experience: A report based on aggregated and anonymised user data from Xero subscribers, amongst other sources.
  • Forrester study, 2020 – The Next Chapter For Small Business: A global SMB and consumer survey, commissioned by Xero and conducted by Forrester Consulting, published in October 2020

Insights also came from accountants and bookkeepers who use Xero to serve their small business clients.