Conducting a Business Stress Test
By: Joe Romeo, Senior Business Development Representative, Hennessey Capital
As the nation has observed the government bailout process, I would like to think we have learned one thing – conducting a business stress test is a valuable exercise. We watched government require the banks to undergo stress tests to make sure they could survive the most difficult market conditions – what did we learn?
It’s important to evaluate just how fragile your businesses truly is and gauge if your business has what it takes to weather an economic storm. This is where a “self-administered stress test” comes into play.
This exercise is a key part of “strategic contingency planning” which will
test your operation under the most extreme, worst-case scenarios. What is the potential impact if key aspects of your business outlook change?
The “self-administer” component is a key part of the test. You do not need an outside consultant to help you through this process - you know your business best and can determine events would be most devastating.
Pose a few “what if” questions to your executive team:
- What if business revenues dropped 25%?
- What if price competition forced you to drop your prices by 20%?
- What if your biggest customer defaults?
- What if you lost your two largest accounts?
Run the numbers and see what your balance sheet looks like. How could the results impact your financing relationship?
The exercise of doing so may be a bit sobering but will prove wise. This should be a part of every businesses strategic plan. A contingency plan is critical to your survival.
Delaying ambitious business growth objectives in favor of establishing a rainy day reserve that can sustain the business through an extended down period would be prudent.
The days of unbridled growth and “the sky’s the limit” attitudes may not be gone, but should be tempered with other market-place realities that could occur.
to succeed in 2010 and beyond requires a new approach. Thus, I offer 3 tips to prospering in a tough economy:
- “Assume the position.” In the confusion of these uncertain times, people are looking for some direction. Assume a leadership position and be bold enough to lead the way
- Include a business stress test as part of your strategic planning
- Over-deliver extraordinary customer service and exceed expectations. Get outside your business’s comfort zone to defy the status quo and customize your product or service to fit your customers’ need
Insight on the banking community’s stress test:
http://www.nytimes.com/2009/02/26/business/economy/26banks.html?_r=1
