Why stress testing finances is a good idea for SMEs right now

October 9th 2020 | Posted by phil scott

Why stress testing finances is a good idea for SMEs right now

There is no doubt that this is a period of uncertainty for many businesses. Closures and restrictions are making it very difficult for business owners.

This has been the case since early in the current global crisis and the problems seem set to continue. For this reason, many finance directors are advising about the importance of stress testing finances. Doing this helps businesses to have a complete understanding of their financial situation, giving them a better chance of building resilience.

Finance stress testing measures for businesses

There are several actions which the best finance professionals facilitate within businesses in order to stress test finances. These actions are essential in aiding the survival and growth of a business especially in difficult financial climates like the current one.

  • Considering the ongoing cash flow situation in a realistic manner. This includes looking at the situation in one month, two months and three months, to get an accurate, longer-term view.
  • Looking at different scenarios such as the non-payment of invoices or problems with the supply chain. Doing this highlights potential obstacles and enables the implementation of risk mitigation measures.
  • Examining the current ratio. This enables a business to understand how it stands when it comes to meeting financial obligations, such as making payments to suppliers and HMRC.
  • Analysing the liquidity ratio. Doing this allows owners and directors to determine the ability of the business to pay off debt without accessing external capital.

The best finance directors know how important examining ratios is to a business, especially one that is highly geared. This is especially true in the current climate when many businesses are struggling to meet their financial obligations.

The importance of constructive and transparent dialogue

Top finance professionals ensure that finance stress testing is combined with constructive dialogues with creditors where necessary. This includes being honest with lenders, landlords and suppliers about potential cash flow issues and an inability to make payments on time.

In the current climate, many businesses are in a precarious situation. This means that there is a greater level of understanding in many situations. For this reason, it’s more important than ever for businesses to have honest conversations with creditors, in order to reach mutually agreeable arrangements such as payment holidays.

In summary

Financial strain is always a major issue for a business. However, right now, it’s even more important for owners and directors to make sure that a business is financially resilient.

With this in mind, the best financial professionals ensure that financial stress testing measures are used to ascertain the current financial standing of a business. This provides an accurate background against which a business can effectively plan and build financial resilience.

This resilience could be the difference between surviving the current period of uncertainty and not doing so. It’s also a vital factor in helping businesses to flourish once the current crisis subsides. This is important not just for individual businesses but for the growth of the economy as well.

If you are an FD/CFO looking for your next role, register with us. If you are on looking to hire an FD/CFO, get in touch.