How To Stress Test Your Business
Managing and operating your business when everything is running smoothly is relatively easy to do but how would you manage an issue that significantly impacted on how your business operated and threatened the ongoing viability? Being able to stress test your business can prepare you for when something has an unexpected adverse impact on your organisation.
A stress test for your business mainly involves analysing and assessing the impact on your business under certain circumstances and then identifying strategies that could be implemented to address the impact. This could occur due to a new competitor opening up, changes in legislation increasing costs, your business is growing too fast or your cash flow is decreasing or too slow to arrive. To help you to stress test your business look at the following questions and work out what you would do to address each issue.
- Do you know your breakeven point and by how much sales would need to decrease to reach that point?
- If sales volume did decrease what production or overhead costs could be reduced?
- What is the impact on your profit if you decreased prices by, for example, 5% or 10% and is this a viable option?
- Would a decrease in prices increase sales volume or would it stay the same?
- Do you have a large debtor and what would be the impact on cash flow if they did not pay their account or they were late in making the payment?
- If you were able to collect outstanding amounts from your debtors, for example, 1 or 2 weeks faster, what would be the impact on your cash flow?
- If you have any loans, leases or any other financial contracts what level of cash flow do you need to maintain so you don’t go into default?
- If you needed short term cash to pay an outstanding debt what assets, if any, could be sold to make the payment.
These are just some examples of issues that you may need to address if they occurred. Depending on your business there are going to be other issues that could have an impact. The main issue with stress testing your business is that you have a plan and strategy that you could quickly implement should this happen to you.