Small businesses in Australia should brace for more pain this coming financial year, the ANZ warns in its latest report as the power of a stronger dollar and the lure of the Internet marketing on Australian consumers will continue to weigh down on sales.

ANZ general manager for Small Business Nick Reade says the high Australian dollar, leakage of sales overseas from the internet and retail price deflation will continue to squeeze small business.

The warning comes as the bank's Small Business Sales Trends monthly report just issued shows the service sector helped drive a 3.1 percent year on year (y/y) rise last month.

It was the strongest small business sales growth for 15 months, but retail was up just 0.2 percent y/y. The 2011 Year to Date (YTD) average retail growth is at 0.0 percent, down 2.8 percent on the 2010 YTD.

"We're pleased to see growth coming back into some sectors but tough trading conditions in retail means some businesses will continue to be under pressure to manage cash flow through the cycle," Mr Reade said.

He tips consumer caution on spending will keep retail conditions challenging.

"The high Australian dollar will continue to see spending leaking overseas via the internet and most imported goods prices achieve little price increase or experience deflation," he said.

Mr Reade flagged possible interest rate rises, which would continue to deter shoppers.

But he forecast strength in mining investment, "which should benefit regional spending over metropolitan spending".

ANZ head of Australian Economics and Property Research Ivan Colhoun said regional small businesses had slightly stronger sales growth than their metropolitan counterparts, as was the case in the previous month, although the gap narrowed.

"This may reflect the mix of small businesses in each region, with more (relatively hard-hit) retailers concentrated in the metro regions, and a greater mix of small businesses providing business and trade services in regional locations," he said.

"More broadly, the strong outlook for the mining and agricultural sectors is expected to support continued outperformance in regional areas."

Mr Colhoun said the best performing industries were business services, up 11.6 percent (y/y), and trades, which rose 8.5 percent (y/y).

But he said: "These areas of spending were bouncing back from relatively weak performances during April associated with the extra-long Easter/ANZAC Day long weekend."

Trade services are benefiting from more work following the natural disasters experienced across the country, Mr Colhoun said.

South Australia is the best-performing state, with 5.5 percent y/y growth last month and 1.2 percent for the YTD. Mr Colhoun attributed this to increased international migration and the strong mining sector in that state.

New South Wales and Victoria each recorded a sales rise of 3.7 percent y/y, but NSW's 2011 YTD average was down 1.2 percent, while Victoria recorded YTD growth of 0.8 percent.

Small business sales in Western Australia were up 3.3 percent y/y (0.0% YTD), 2.4 percent (-0.5% YTD) in Queensland and 0.2 percent in Tasmania (-3.1% YTD).

But revenue fell 2.2 percent y/y (-4.2% YTD) in the Australian Capital Territory and 5.5 percent (-4.1% YTD) in the Northern Territory.

"This month's data, which indicates differences across states, supports the evidence from other indicators which suggest NSW is still relatively slow," Mr Colhoun said.

"Queensland's still inconsistent due to the lingering effects of the recent natural disasters and the subsequent rebuilding process.

"On the other hand, the data reflects a strong performance in Victoria with continuing strength in population, employment and housing construction rates.

"The data does vary month by month, so we tend to look at the YTD figures. The economic data suggests that small business sales in the Northern Territory have been showing relative weakness for some months now."

ANZ's data is based on the value of credit and Eftpos transactions processed through its systems and card transactions processed through other systems for businesses at least two years old with turnover less than $5 million. ANZ has a market share of about 20 percent of all card transactions.