Costs up, margins down: the pressures squeezing Australian small business and what the numbers really show

Australia has 85,130 more trading businesses than a year ago, but the people running them face the tightest margins since 2020. Our new National Report brings together the latest official data to show where the pressure is coming from, and where the opportunities are hiding.

Despite everything, Australia's small-business community is growing.

There were 2,814,778 actively trading businesses at 30 June 2026, up 85,130 (3.1%) in a single year. Every state and territory grew. Employing businesses rose to 996,203, the first annual increase in that group since 2021-22.

Insolvencies also eased slightly. The number of companies entering external administration for the first time fell 3.9% in 2025-26, to 14,153.

So the sector is not shrinking. But growth in numbers does not mean the businesses themselves are finding it easy.

This is the defining story of the year.

NAB's September-quarter survey shows business purchase costs rose 1.2% in the quarter and labour costs rose 1.2%, while the prices businesses charge rose only 0.5%. Costs are rising more than twice as fast as prices.

The result is predictable. Sales margins fell to −20, the lowest since the June quarter 2020. Business conditions fell to −2, the first negative reading since the September quarter 2020. Wage costs remain the top issue affecting confidence, followed by pressure on margins.

The Reserve Bank lifted the cash rate to 4.60% on 29 September, the fourth increase of 2026 and the highest rate since November 2011.

Inflation reached 4.0% in the year to August, up from 3.8% in June. The Reserve Bank has said further rises remain possible if needed, citing global energy prices that are much higher than it had assumed in August.

For a small business carrying an overdraft, equipment finance or a loan secured against the family home, each increase flows straight through to monthly costs.

Electricity prices were 13.2% higher over the year to August, mainly because Commonwealth rebates ended. Automotive fuel rose 13.5%, including 14.8% in August alone, and average pump prices were above $2.30 a litre nationally in early October.

There is some relief. Regulated small-business electricity prices fell from 1 July in New South Wales, Victoria, Queensland and South Australia, and wholesale electricity prices have eased sharply. But regulated prices rose in Western Australia, Tasmania, the Northern Territory and the ACT, and fuel, gas and interest costs are heading the other way.

The report also flags gas as a risk ahead, with supply expected to be tight in the southern states in winter 2027.

Cashflow remains the issue that keeps owners up at night. It is also one of the most requested topics in Small Business Australia's coaching programme.

There is a little good news. Large businesses paid 68.5% of small-business invoices on time in the second half of 2025, up from 66.7%. But the slowest payments are still slow: the 95th percentile payment time was 55 days, down from 62.

Nearly two months is a long time to fund wages, stock and rent while waiting to be paid, particularly with interest rates at their highest level in almost 15 years.

Consumer sentiment fell 4.7% to 80.4 in October, well below 92.1 a year earlier. Westpac's survey showed sentiment dropped sharply among people surveyed after the September rate rise.

Spending patterns are shifting too. CommBank reports spending on essentials rose 4.8% over the year to August, overtaking discretionary spending at 3.3%. Household spending overall was flat in August.

For businesses that rely on discretionary spending, such as hospitality, retail and personal services, that shift matters.

Behind the headline growth sits a sobering statistic. Of the businesses trading in June 2022, only 61.9% were still trading four years later. Roughly one in two new businesses does not reach its fourth birthday.

The report is careful to explain what that does and does not mean. About 375,331 businesses stopped trading in 2025-26, but only 14,153 companies entered formal insolvency. Four in five exits were non-employing businesses, many of which simply stop trading. Owners close for many reasons, including retirement, a sale, a new job or family circumstances, as well as cost pressure.

The full report explains why these numbers do not match, and why a fall in insolvencies is not evidence that fewer businesses are struggling.

One finding stands out as a genuine opportunity.

Only 11% of small and micro businesses use artificial intelligence, against 35% of large businesses. That 24-percentage-point gap is, in the report's words, the defining capability story of the year.

The barrier is rarely the technology itself. It is time, trust and the lack of a credible guide. The report suggests the businesses that close this gap in 2026-27 will set themselves apart from the 89% of small firms that have not yet started.

The report's outlook is clear: plan for higher costs of money and energy through 2026-27. Cost discipline is likely to matter more than expansion while margins remain under pressure.
In practical terms, that means knowing your numbers well: which costs are rising fastest, how long customers take to pay, and where your margin is being lost. Then focus effort where it makes the biggest difference, whether that is improving cashflow, protecting existing customers, attracting new ones or making better use of digital tools.
Small Business Australia offers practical support in each of these areas, including cashflow and finances, sales, attracting and keeping customers, online strategy, digital security and team development.