Stress testing your business before disaster strikes will help you avoid failure. Even if your business is not directly impacted by disaster, changing market conditions or your relationships with businesses that are directly impacted can seriously hurt your business.
Michael Fingland, managing director of Vantage Performance, said thousands of “unaffected” Australian firms should now be putting initiatives in place to bulletproof them from flood or disaster impact.
“Even if floods have not directly impacted a business, the environment in which they operate may change significantly and future success will depend on their ability to meet changing market conditions,” Mr Fingland said.
“Now is the time for owners to stress test their businesses through detailed financial modelling and “what if” scenario testing, to discover how the knock-on impact of the floods will affect their businesses and to plan what initiatives they will implement to combat these challenges.
“Stress testing puts business owners in a stronger position if they need to negotiate with their financiers, by showing they are prepared for change and able to handle challenges,” he said.
Mr Fingland said stress testing provides business owners with the ability to act timely in response to change, allowing them to make prudent decisions very quickly.
How to stress test your business
Stress testing focuses on analysing base case and worst case scenarios and provides a number of benefits to business owners, including:
- Enabling businesses to react quickly if/when conditions change suddenly
- Forcing business owners to ask ‘what if’ and create strategies to deal with potential scenarios to minimise risk and maximize opportunity
- Clarifying short to medium term capital requirements
- Increasing the confidence of key stakeholders
- Minimising stress on the business when tough decisions need to be made.
An effective stress testing program will include the following key questions:
1. What is the new break-even sales level for the business, taking into account changed product/services demand and altered supply conditions?
2. How would lower demand for products/services impact revenue and earnings?
3. Would this translate to lower staffing demand, and what effect would this have? Does the business have sufficient cashflow to fund redundancies?
4. How low are you prepared to reduce prices before it becomes unviable to sell the product or service? What changes will need to be made to the cost base to match a lower revenue base?
5. How is cashflow impacted if debtors take an extra 10 days to settle accounts?
6. Is the business at risk of breaching financier covenants? If so, how will you respond to financier concerns?
7. What changes will be required to finance facilities and how would your financier react to a request for increased lending?
8. Which overheads can be reduced and what capital expenditure plans can be put on hold to preserve cash?
9. What non-core assets could be sold to reduce debt or provide extra cash flow?
10. At what point are sales/production levels too low for the business to remain viable? Is a merger/strategic partnership an option? Who would you approach?