Give Your Business a Stress Test

Bill Warner Tuesday, May 12, 2009

Hey, here’s an idea. If banks can undergo a stress test, you might want to consider doing the same thing for your business. This might be worth your time if you do it with the objective of determining if you can withstand the worst of economic situations.

Determine the stress on your business

Start by making some reasonably pessimistic assumptions about your industry and market segment. Don’t be ridiculous, but make assumptions that represent the worst case you can realistically imagine. For example:

  • Assume your market segment growth is flat or even down year to year; whatever is indicated by the changing trends in your industry.
  • Make assumptions about the cost of goods and services, all of which will have an effect on your gross profit.
  • Project what might happen to prices, especially if you see new competitors emerging or the possibilities of price reductions by your current competitors.
  • Assess what will be changing about your customer’s purchasing behavior. Will the sales cycle be longer? Will the need for your products and services survive budget cuts?
  • Take account of what is happening in the legislative and regulatory world. Will changes in government subsidies affect your business or your customer’s business? Will tax increases affect you or your customers.

Calculate the changes in your financial outlook

Any of these stress factors will have an effect on your ability to do business and need to be reflected in your financial forecast. Express these stress factors quantitatively so that you can reflect them as changes in your Excel spreadsheet assumptions that drive your financial forecast:

  • How will marketing productivity be effected?
  • What will happen to sales productivity and closure rates?
  • What changes will have to be reflected in your cost of marketing and sales?
  • Will there be changes in your assumptions for operating expenses?
  • What changes should be made to prices over the next couple of years?

Perform what-if analysis

With your new assumptions, update your financial forecast spreadsheet and let Excel determine what will happen to your financials over the next 18-24 months.

  • Will your gross profit still be viable?
  • Does your expense structure still work?
  • Are you profitable?
  • Do you maintain a positive cash position?

Determine required actions

With your completed stress test, make some judgments as to what you need to do to assure your survival if your pessimistic assumptions become reality. You may find that you need to make certain changes now or at least determine contingency plans that could be executed if the situation requires them.

  • Should you raise money to pull you through the tough times?
  • Are their cost and expense actions you should be taking right now, just to strengthen your financial position?
  • Will you be able to realistically cut costs and expenses further if times get tougher? Create a plan for such actions.
  • Should you take preemptive action on prices now?
  • Do you need to reduce staffing now?

Be totally objective

We are talking about your business, so be bluntly honest about your market situation. This is not a time for unfounded optimism. Be optimistic about your chances of survival, but be realistic about what challenges you face. If you are, you will come up with actions that will save your business. By taking action now, before a disaster hits you, you are giving yourself the maximum chance of winning.

Filed Under: Financing a Company, Business Operations, Managing Business Financials



Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.

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Tuesday, May 26, 2009

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