Financial Tests For Business

Last week I went for my annual physical.  I am doing fine, but the doctor had me undergo a stress test.  As I was briskly walking on the treadmill, I thought about the bank failures and financial stress tests.  What exactly do they measure and how can a company determine their financial stability through one?

According to an article in accountingtoday.com, a bank’s stress test involves looking at its loans: determining which ones are likely to default and then figuring out if the reserves contain enough money for survival.  The article went on to note that the stress test financial formula could change, depending on which regulating authority performed the test.

I found an interesting article by Michael Gunther, the president and founder of Collaboration LLC about performing stress tests on your business.  The questions below will help owners and manager s to evaluate their business objectives and determine if the company is prepared to succeed and thrive. 

• If your sales decline by 10%, 20%, or more, what will you do to be profitable?
• If you lost your top three clients, what plan does your business have in place to generate new key clients?
• If you lost the ability to obtain additional credit, how would you finance your business?
• If you lost your top two employees, how would you manage their roles and find their replacements?
• If new competitors enter the marketplace, how will you respond?
• If your competitors lower their prices in order to gain market share, how will it impact your sales and revenue?
• If interest rates rise, how will you handle the increased costs on loans and credit cards?
• If unemployment continues an uphill climb and consumer spending continues to decline, how will that impact your business?

Next, ask yourself the same questions in regards to positive business growth

• If sales grow by 10%, 20%, or more, is your company prepared to handle the growth?
• If you find three or more potential top clients, how will you entice them to purchase from your business?

The questions are meant to spark discussions and help your business be proactive in developing a plan for each scenario. 

Do you have tests or measures for your business’s finances?  What signs have you seen that the economy is improving or staying stagnant?  Tell us about it on our blog.