Business Finances and Business Accounting for your Business
Wants to make your business resilient to any financial shock? Here we are with the method to do it.
Everyone wants their business to survive in critical conditions and perform well in the market. For the survival of one’s business in any uncertain and sudden conditions, one has to be prepared before any calamity. There are many ways by which one can prepare for tough times. The financial stress test is one of the tests that help in making quick moves during tough times in business. This test is conducted mostly for small business owners. In this article, we’ll talk about how to conduct a financial stress test.
Financial Stress Test
It is a process that helps to evaluate one’s business. When this test is conducted, business owners get to know about their business. Business owners will know how their business will run during any tough conditions. This test works as a tool. With the help of that tool, one can easily evaluate the business and prepare for any problem. Many conditions can be a threat to your business at a specific time. So this test is basically for early preparation for every worst condition. Besides preparing for every condition, it will also help in making beneficial plans for the future.
Way of conducting a financial stress test
First, prepare a spreadsheet that contains three columns. In these columns, there are different details of the business.
1st column contains information about the income that is to be received the next year.
2nd column contains the information on expenses that are to be expected.
3rd column contains the details of the money that is not received but billed.
After that, combine all the amounts present in each column. You will get the total of every column. Then do the subtraction of income of column no. 2 from column no.1, the expenses and you will get to know that are you in a danger zone or not. In case your answer after subtraction came in the negative numbers it means that your expenses are exceeding your revenues. On the other hand, If there is a large amount after subtraction then there is no need to worry. Otherwise, preventive measures should be taken
Take preventive measures
If after calculation the figure you got is negative, then it is time to worry about your business. At that time you should take some preventive actions and measures to save your business. Many things can be done to help your business in tough times. Following are some of the ways.
- You can take a bit from the pending bills to manage your expenses and maintain a balance in revenues and expenses.
- Stop hiring new employees.
- Try to avoid extra expenses that are of no worth.
- Convince your clients of extended payment methods
Some other ways will also be helpful for the business. Market your product in a good way. Enhance your marketing skills so that your business improves. You can change the marketing strategy by applying for some promotions on your product and presenting some offers to your customers. Limit your amount, and save some amount in case of any worst condition.
Other things that drive financial stress test
Ups and downs in the business cause the owner to think about the financial stress test. When there is tough competition in the market and the sales are going slow then financial stress test should be done. It helps in taking preventive actions. By identifying the problems early, one can try harder to make their business grow well. One can make necessary arrangements for bad times.
Financial stress tests are not only done to detect the balance between the revenues and the expenses but they can be proven helpful when one has to estimate the business growth and profit also. As when the difference between the revenues and expenses is high this means that there is plenty of money that can be added to profit. Also, a financial stress test can give an estimation about how to spend and how much to spend on expenses to maintain a balance between revenue and expenses. The financial stress test in actuality is used to separate an amount of money that can be used in tough times. This is a sustainable approach to run a business.
Practical explanation of financial stress test
There are several financial stress tests outside the standard three-column one that takes market dynamics into account. Many companies manage their business in different ways. Here is an example of a company named ManForm that manufactures and sells shoes to shoe retailers. In the pandemic of covid-19, everything was shut down. At that time the company was in complete shock as millions of dollars for the company were at stake. The team of the company conducted a financial stress test.
With the help of the stress test, the company changed its market strategy. They took a quick decision of selling their product at a low cost and it worked very well for them. The company used the PESTLE study as a framework to identify its stress elements. PESTLE is a marketing framework that considers the political, economic, social, technological, legal, and environmental issues that can have an impact on a company.
In the financial stress test, the company analyzed all of its income. The company managed how it will survive during that pandemic times. Their quick decision leads to the best-selling of their shoes.
Conclusion
As we said earlier, everyone wants to grow their business well in all conditions. We are not aware of any condition that suddenly occurs and can cause harm to our business. If you want to guarantee that your firm will remain successful for a long time and bear the shocks with vitality then you must conduct a financial stress test. This test will help you to make better judgments about your marketing, business planning, strategies, and expenditures by knowing whether your finances and income can resist any worse condition.