With five interest rate rises over the past year, small businesses up and down the country are feeling the heat.

But with many owners bogged down in everyday issues such as managing staff or winning new clients, there is a risk that they may not realise how serious the financial situation of the company is until it is too late.

“For many companies the owners or senior management are too embroiled in the day-to-day management of their businesses to realise how susceptible they are to this ever-changing financial climate,” said Fred Edwards, managing director of myFD. “Not having an action plan if the squeeze comes can have catastrophic results for small businesses, with owners in some instances losing more than their businesses.”

With five interest rates in the last 12 months and more expected before the end of the year, small business owners need to keep track of exactly how well their company is really doing

MyFD recommends the following five-point plan to work out how well your business is really doing:

  • Be honest, really honest, about the state of your business: who your customers are and what they are buying. We recently came across a business that was in denial about what it actually did. The reality was it had an unglamorous label and by pretending to be something more glitzy, it over-invested in marketing and resources that were wholly inappropriate and neglected its customers
  • Have a forecast, particularly regarding cashflow. When times are tough, the old adage that ’turnover is vanity, profit is sanity, but cashflow is reality‘ becomes very important. If things are tight, do a weekly or even daily receipts and payments forecast as well as the integrated profit and loss, balance sheet and cashflow (financial) forecast. It‘s so important to look ahead so that critical large payments such as VAT and PAYE are made on time
  • Make friends, particularly with your bank manager. The natural instinct is to batten down the hatches when you see the storm coming but make sure key suppliers, customers and the bank are on the inside by communicating with them. Banks, in particular, hate surprises yet, if they are forewarned and feel confident that you are doing everything to keep afloat, they can be very supportive
  • Be vigilant. Credit control is vital and if any of your customers are also feeling the pinch then the chances are that the suppliers who shout loudest will get paid first. If they don‘t pay they‘re not real customers. By regular contact you can get a feel for what is happening: you may find a competitor is struggling more than you, so there may be opportunities to pick up business. This is where a good finance director provides solid support by reviewing recent customer financial information at Companies House and perhaps using Google alerts to keep track of latest events
  • Get help from people you trust: successful big companies take advice on all sorts of things. It‘s not a sign of weakness. When times are tough you need to focus on what you do best and keep your team with you. Having expert help will release your time and get you out of the mire more quickly