A financial stress test could be just what your business needs to be prepared for the future and any uncertainty that it holds. Consider taking measures to conduct one so that your business is secure.

What is a financial stress test?

The concept of a financial stress test comes from a practice used by some banks. Essentially, it is an analysis of how your business would handle difficult financial circumstances, whether it be new, unexpected competition, a recession, or even a natural disaster. Simply put, it's a plan to deal with worst-case scenarios to help your business avoid being blindsided by them and help you weather whatever is thrown at you.

How can you conduct a financial stress test?

You're basically giving your company an evaluation the way you would for an individual employee to assess their value to the business. What areas need improvement and which ones are making a positive impact? What can you do to tilt the scales further in a positive direction?

Bill McBean, author of The Facts of Business Life, suggests¹ analyzing what went well and what did not for your business over the past year, going over your processes and systems to see what's efficient and what's not, reviewing marketing campaigns, cutting costs, setting realistic goals, and pinpointing the best customers and adding value for them to increase loyalty.

Outside advice can also prove extremely valuable. Don't be afraid to reach out to other experienced entrepreneurs and experts who can help you figure out how to steer the ship in the right direction.

Go to the SCORE website and request a mentor if you haven't already. SCORE is a huge network of volunteer expert business mentors. According to the organization, small business owners who receive three or more hours of mentoring report higher revenues and increased growth.²

You can also get helpful advice from those in your inner circle. McBean says, "Meet with key advisors. These specialists, including your accountant, attorney and banker, almost certainly know things you don’t. Planning for a future you can’t predict is part of a business owner’s job. These advisors can help you gather the information needed to get the 'lay of the land' and give you market information or alert you to new circumstances you weren’t aware of; that helps you make better decisions."

Financial stress tests can help alleviate human stress

Don't discount the effect that a financial stress test can have on your own positive attitude and that of others who depend on your business. Steve Nelson at Evergreen Small Business suggests the biggest benefit may be the reduction of anxiety among stakeholders, including owners, employees, vendors, and customers.³

"If people know the firm will still be around even after a worst case scenario actually occurs, that means people can focus on getting through the storm safely and keeping the business as strong and as healthy as possible," he says.

Prepare for harsh times

As you prepare for the worst, one of the best things you can do is to give yourself as much financial padding as possible. Sure, you can cut costs and add more to your savings account on a regular basis, but it’s also prudent to get a business loan or line of credit before you really need one. Apply for financing when times are good, because it may be harder to get what you need if you wait until you're desperate. Develop an emergency fund to draw on when cash flow dries up or when times get particularly tough.  

Analysis and preparation could be the difference between your business staying open and having to close due to a crisis. The sooner you can enact a financial stress test, the better handle you will have on how your business will be able to withstand such circumstances.

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.