With the World Bank forecasting that more than half the world’s economies will underperform even 2010’s low growth averages, businesses will find themselves under increasing financial pressure in the back half of 2024 and beyond.

In the face of global economic underperformance, it’s imperative for business owners to consider implementing strategies to survive any downturn and thrive when conditions bounce back.

A stress test is perhaps one of the most important tools any business owner can use in their business, serving as a comprehensive route to building and protecting long-term business resilience.

What is a business stress test?

In essence, a stress test models predicted or likely market changes, be it reduced customer spend, rising production costs or any other major industry or economic change against the business’ profit and loss and cash flow.

This illustrates how unforeseen changes and challenges might impact the bottom line and enables business owners to develop a plan to counter them.

A stress test is perhaps one of the most important tools any business owner can use in their business.

With a pre-prepared plan in their back pocket, business leaders will be well-placed to make prudent decisions to stabilize their position and rise above any major economic or market changes.

As much as stress testing and its subsequent planning can provide peace of mind for business owners should the worst strike, it is also an effective tool for maintaining or rebuilding stakeholder confidence.

Business owners can use a stress test to demonstrate to financiers and investors their resilience to economic challenges – an effective way to reaffirm their confidence and support.

Key stress test questions

Knowing the right questions to ask of your business is critical to ensuring you’re on the right track to improving resilience.

The questions should test your business performance and assist in producing solutions for how your business could react should economic or market change occur.

Here are a few questions to ponder:

• What if revenue dropped by 20 percent? What’s the resulting impact on earnings and cash flow?

• How low are you prepared to reduce prices before it becomes unviable to sell the product and/or services? What changes will need to be made to the cost base?

• How is cash flow impacted if customers/debtors take an extra 10 days to settle accounts? What if this blows out to an extra 20 days?

• What changes will be required to finance facilities and how would your financier react to a request for increased lending?

• Which overheads can be reduced and what capital expenditure plans can be put on hold to preserve cash?

• At what point are sales and/or production levels too low for the business to remain viable?

• Is a merger or strategic partnership an option? If so, who would you approach?

Free resources aimed at assessing business resilience, like Vantage Performance’s own Vantage Resilience Index (VRI) can also be helpful when examining how a business might perform in the face of a challenge.

Using the VRI tool, business owners answer 50 questions over 10 minutes (with no financial data disclosed) to determine the business’ strengths and weaknesses. These are then benchmarked against traits of globally leading businesses, providing business leaders with an opportunity to compare and identify the areas where business resilience could be improved.

By asking the right questions of their business, well-prepared owners or managers will find themselves able to stabilize quickly and gain a six-to-12-month head start on their competitors, allowing them to be in prime position to take greater market share.

Additional benefits of stress testing

Beyond its use as a critical risk mitigant tool, stress testing is also an effective way of ensuring the business purpose and market niche remain consistent during periods of growth or expansion.

With cash flow and pricing front and center during stress testing, business owners are forced to identify their most critical drivers to develop an action plan moving forward.

Stress testing takes time and effort, but it does pay dividends for business owners and leaders when it comes to surviving tough times.

While it’s always good business practice to maintain a clear business purpose and market niche, it can be helpful to revisit this through stress testing and ensure they are staying on track.

By preparing well in advance how they might handle a turnaround situation, notoriously one of the most stressful situations any business can face, business leaders will be better placed to guide their business and its employees through any challenges and out the other side.

Stress testing takes time and effort, but it does pay dividends for business owners and leaders when it comes to surviving tough times.