Stress testing your business

2020 has challenged businesses on a global scale. With restrictions, shutdowns, and a global financial crisis changing many businesses operating conditions, business owners are struggling to keep up with the increased speed of change that 2020 has brought about. So what can you do to protect your business against the unknown?

While many businesses have started their crisis management plans, and have been busy figuring out how to adapt to market changes, many don’t take the next step and financially stress test their business. A financial stress test gives business owners an early understanding of how best to prepare and operate their business when they fall on tough times.

Some simple analysis can reveal the key areas of business financial stress and vulnerability:

  • What is your breakeven level?
  • If you make your product or service more affordable to your clients, what can you do to reduce other costs to maintain the reduced revenue?
  • Can you afford to extend debtor payment terms?
  • What would be your banks and financiers attitude to increased lending, if required?
  • Are staff cuts needed? And what does this look like, pay reductions, fewer hours / shifts? Can you afford to pay out redundancies?
  • What overheads can you reduce? How can you hold on to more of your cash?
  • What non-essential assets could be sold?
  • Would a partnership or a merger be the best option to preserve the business? How would you go about this?
  • What government funding is available and how can it assist cash flow?

Stress testing will allow you to determine the length of time your organisation can operate under different pressures, and allow you to be calculated in your response rather than running out of time to consider alternatives. With time on your side you will be able to negotiate outcomes with stakeholders, staff and financiers, something that becomes increasingly difficult to do once your business is in distress. 

Businesses need to respond quickly during any crisis, but these responses should be well thought through. If you don’t feel you have the diagnostic tools to identify key financial stressors and plan accordingly seek advice from your business advisor.