How a stress test can help to identify financial problems in uncertain times


Due to the coronavirus pandemic, businesses all across the UK are facing uncertain times and new challenges.

Surveys conducted in March 2020 by the Office for National Statistics suggested that just 40% of UK businesses felt confident that they could continue to operate during this pandemic.

With cash flow a key component in how well businesses will fare through this time, conducting a stress test can be a useful way of identifying the areas in which your business may struggle and help you feel more prepared.

A stress test will give a good indication of how robust your business is and how it will fare in uncertain times.

With no knowledge of how long the pandemic will continue to impact businesses, it’s important to view your finances with the mindset that this will be a long term interruption.

Robert Hanna, Managing Director of the litigation funder Augusta, recommends focusing on your finances over the next 6 months. He says that “you should stress-test this by modelling that some of your debtors will sadly become less reliable than they may have been in the past, through no fault of their own”.

The suggestion that you should operate on the idea that key customers may find themselves unable to make payments is echoed by the Managing Director of Purbeck Insurance Services, Todd Davison. He has urged businesses to consider how a failure in the supply chain or late payments could affect them, and has suggested coming up with realistic, optimistic and pessimistic views of what could come.

There are different approaches for performing a stress test, and it’s best to use the method you may have used previously. If you are yet to perform a stress test for your business, one approach you can follow is the 6-step approach.

The 6-step approach

  1. Describe business model. The first thing you need to do describe your business model. You may already have this information pre-existing, and some businesses may have more than one business model. In this case you should perform individual stress tests for each business model.
  2. Identify and select stress factors. This step involves identifying trends, uncertainties and outcomes that will cause the business stress. In this instance, these stress factors will be the same for many businesses across the board.
  3. Map business model to stress factors. The next thing you will need to do is map the stress factors to the parts of the business model they affect.
  4. Create heat map. A heat map can then be used to assess how the stress factors will affect the components of the business model, with colour being used to show the severity of the impact and also highlight any impacts that are not negative.
  5. Analyse results. The heat map should show any areas of your business model which are more vulnerable, and you will need to analyse these results to suggest why those areas may be weaker.
  6. Formulate improvement actions. Having identified issues, you can now begin to put together a plan going forward of how to make your business model more robust and protect your business.

Prevent issues from escalating

Having completed a stress test using whichever method you prefer, you should be able to clearly identify where you could face issues and can begin to look for ways to prevent these from escalating.

This could involve contacting loan providers and landlords to ask for a payment holiday, exploring support options from the government such as the coronavirus job retention scheme and the coronavirus business interruption loan scheme, or seeking external finance solutions.

Here are a few recent articles you may find helpful in improving and protecting your cash flow:

Things to remember

While managing your cash flow during this time is likely to be stressful, there are several things you should try to keep in mind.

Remember that this global pandemic will affect all businesses in one way or another. This means that you can’t confidently rely on any of your customers to make payments on time, or even at all.

It also means that you should be continually checking in with both your customers and your supply chain. Being able to identify issues with payments early and have open conversations will give you the best chance at alleviating the effects.

Finally, don’t forget that help is still available. Having discussions as early as possible with the appropriate financial services will give you the best chance of securing the support you need.

If you want to discuss your commercial finance options, call 0800 9774833 to speak to one of our funding consultants, or request a call back at a time that suits you.


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