In my quest to help companies make their finances as strong as possible I’ve been thinking about how we could stress test our own companies.
What is a stress test?
A stress test really just means how vulnerable is your business to a financial crisis, or even a hiccup, and how would you deal with it. The real cost of an unexpected problem is of course the distraction factor. So much time gets eaten up, and it takes you away from what’s important.
So here are some simple questions that you can answer to stress test your business, thinking about any weak points that could plunge you into a distracting crisis:
1) Do you rely on 1 main customer? Are they happy, are they paying on time, is their credit rating strong, could you afford to lose them or have them pay you late?
2) Are you reliant on an overdraft that’s closely monitored by your bank? It’s important to know what your bank feel about your overdraft, do they want to reduce it? When is your next review date?
3) Can you see your revenue several months in advance?
4) Is your balance sheet accurate – do you actually know what’s on it? Is it being propped up by any over- valued stock, work-in-progress, or debtors that need writing off?
5) If your sales dropped by 10% would you still make a profit?
6) Are your taxes all paid up to date?
7) Do you put your corporation tax, VAT and personal tax away in a separate savings account or do you need to use it as part of your working capital?
8) How much buffer cash do you have in your business? Could you pay the running costs if you had a couple of bad months?
9) What keeps you awake at night? Is it real and how likely it to happen?
10) If you’re reliant on key suppliers are they financially strong, and could you easily replace them if something happened?
12) What is your credit rating? If it’s going down, are you reliant on credit from your suppliers that could be affected?
A really easy way to keep on top of these important areas is to include any relevant figures in your weekly flash or monthly KPI report.
As we know, bad things happen when we’re not paying attention. If you make this routine in your business you’ll make sure you always see the icebergs in plenty of time.