Family Business Insights | Stress Testing Your Business And Financial Plans

The importance of stress testing your business and financial plans is invaluable, especially for family business owners.

From one challenge to the next, business owners that have undertaken stress testing remain resilient.

Of course, you should understand and be aware of the early warning signs that your business could be in trouble.

Some of these could include:

• Customers are slow to pay, and debtor days are increasing, impacting business cashflow
• The business is struggling to pay debts on time and suppliers are demanding payment in cash
• The business is holding too much inventory
• Demand for products or services is declining and the business has lost key customers
• Business costs have risen at a greater rate than revenue
• Compliance obligations have fallen behind, and accounts are in a mess or not up to date
• Credit limit have been reached and the business is struggling to access new finance
• High staff turnover and low employee morale
• You haven’t received a salary from the business and may be paying business expenses with your own cash; and
• You haven’t sought professional advice from your accountant

Business owners need to focus on the day-to-day operation and immediate financial goals, but it is essential to think about the long-term financial health of your business and how any form of change could affect your personal finances.

As a family business owner, you need to prepare for the unexpected, changing economic conditions, consumer sentiment, and even your own health or that of your family, or the health of your employees.

Financial stress tests involve assessing how your business and personal finances would withstand various unexpected scenarios, such as economic downturns, market fluctuations, or changes in regulations.

But it also includes understanding how decisions made by business owners will affect the bottom line, for example acquisition of new businesses, divestment of assets, introduction of new product or service lines, new technology, and so on. All will require concentrated management and have an impact on the business.

By evaluating new challenges your business may face you can better prepare for the unexpected and develop contingency plans to mitigate potential risks.

Here are a few key points that you might want to consider:

1. Awareness of vulnerabilities

Acknowledging that unforeseen events can impact your financial stability is the first step. Some of these impacts are beyond your control. For example, the dramatic change in interest rates over the last 18 months have had a significant negative impact on many businesses, and the economic impact of Covid is still reverberating. Being aware of potential vulnerabilities is crucial.

2. Stress testing

Stress testing your business and financial plans involves simulating various adverse scenarios to assess how they would affect your business. This can include economic downturns, unexpected expenses, or other disruptive events.

3. Resilience building

By stress testing, you can identify weaknesses in your financial strategy and work on improving your business’s resilience. Evaluating various scenarios, such as price increases, changes in creditor terms, reductions in stock availability, or the loss of a key customer, will allow you to develop contingency plans and safety nets.

4. Cognitive biases

Avoiding cognitive biases is essential. You need facts. People often make quick decisions based on a gut feel, or without knowing all the facts. However, taking a more analytical and deliberate approach can lead to better decision making in the long run.

5. Long term perspective

It is crucial to look beyond short-term profits and losses and consider the long-term implications of your decisions. Understand how your financial decisions can impact other aspects of the business. If you do x, y might happen. What’s the correlation? This approach helps ensure the sustainability and health of your business over time.

In an ever changing business environment, being prepared for the unexpected is wise. Stress testing your financial plans and taking a proactive approach to secure your financial future can make a significant difference in your family business’s success and longevity.

To summarise, family business owners should adopt a proactive and holistic approach to business and financial planning, which includes stress-testing their financial strategies and engaging in careful, deliberate decision making.

By doing so you can better secure your financial future while maintaining control of your business.

Want to know more about how Bentleys can help make the most of your business?

Your Bentleys advisors are ideally placed to assist you with business and financial stress testing and have the knowledge and tools to evaluate your business’s health. Make a time for a chat with us today. We can help you to get where you want to be.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.