Mitigating risk through stress testing your business model
Stress testing is a risk assessment tool that allows businesses to determine appropriate measures to take if a crisis occurs. The first step in stress testing is analysing the company’s current state. The second step in stress testing is defining the crisis scenarios to be modelled. The third step in stress testing is creating systems to test the resilience of the business during uncertain situations. The fourth step of stress testing is modelling and analysis. Finally, the fifth step of stress testing is interpretation and escalation.
Stress testing is a risk assessment tool that allows businesses to determine appropriate measures to take if a crisis occurs.
Stress testing is a risk assessment tool that allows businesses to determine appropriate measures to take if a crisis occurs. It’s an essential component of risk management, and it can help companies identify weaknesses in their business model.
Stress testing is often used by banks, who must ensure they have enough capital to withstand unexpected losses on their loans or investments. Governments worldwide also use stress tests to evaluate whether their countries’ financial systems are strong enough to withstand major economic shocks like recessions or market crashes–and whether any changes need to be made before such shocks occur (or even better: before they start happening).
The first step in stress testing is analysing the company’s current state.
Once you clearly understand your business’s current state, it’s time to begin stress testing. The first step in stress testing is analysing the company’s current financial situation. You need to know how much money is coming in and going out and what areas are most vulnerable if revenue drops or expenses increase.
You should also look at your customer base and market position–are they growing? Are they shrinking? Where do they come from? Are there any trends that might impact your ability to retain them (e.g., younger generations moving away from traditional media sources)?
Finally, consider what risks and vulnerabilities exist within each area identified above: What could happen if things go wrong? How would those situations impact revenue streams or cost structures?
The second step in stress testing is defining the crisis scenarios to be modelled.
The second step in stress testing your business model is defining the crisis scenarios to be modelled. This can be a tricky endeavour, as it requires first identifying what types of crises might affect your organisation and how those crises would manifest themselves. Once you’ve done so, the scenarios you choose must be representative of real-world situations and manageable in scope.
To help start this process, here are some questions to ask yourself:
- What kinds of events could occur that would negatively impact my organisation?
- How would these events affect our operations? Our people? Our finances? (If applicable) What regulatory changes might affect our industry or competitors? How might they affect us differently than other businesses in our industry sector?
The third step in stress testing is creating scenarios to test the resilience of the business during uncertain situations.
The third step in stress testing is creating scenarios to test the resilience of the business during uncertain situations.
- Scenarios should be realistic: If you’re a startup and your company has never experienced a downturn before, it’s unlikely that your risk appetite will be high enough for you to be able to withstand one now. So you need to understand what kind of environment would make sense for your business model and adjust accordingly so that it doesn’t completely derail everything else (or worse) when something wrong happens.
- Scenarios should be relevant: Because we’re talking about stress testing here, we don’t want our models focused on things like “what if my competitor launches an amazing new feature?” Instead, think more broadly–for instance, by asking yourself questions like: What would happen if my prices were suddenly 10% lower than everyone else’s? Would anyone notice? Or consider these two scenarios side-by-side: In one method, there are no competitors; in another system, there are several strong ones that capture most customers’ attention (and wallets). Which seems more likely?
The fourth step of stress testing is modelling and analysis.
The fourth step of stress testing is modelling and analysis. This step is where you’ll use your assumptions you’ve your business model to create a model that enables you to analyse how different scenarios will affect your company’s companies.
The most important thing about this model is that it should be flexible enough to test the impact of different scenarios on your company’s update as new information becomes available. Additionally, it should enable users (both internal and external) to run simulations on other options for mitigating any potential crises before they happen; this way, decision-makers will have all the correct data at their fingertips when making critical decisions during an emergency.
The fifth step of stress testing is interpretation and escalation.
The fifth step of stress testing is interpretation and escalation. Finally, you need to communicate the results of your stress tests with your stakeholders, whether they’re in there or customers. They must withstand what you are doing, so they can support you as necessary and help mitigate risk if there is one.
Suppose there are problems detected in a particular scenario. In that case, the business must know how to address them based on its growth or expansion plans and then communicate those steps with stakeholders who may be affected by them (investors or otherwise).
Stress Testing should be something that all companies incorporate into their risk mitigation strategies.
Stress testing should be something that all companies incorporate into their risk mitigation strategies. It’s a way to prepare for the unexpected; identifying risks and vulnerabilities improves your business model and identifies gaps in your risk management strategies.
Stress tests can help you determine whether or not you have enough money to cover expenses during an emergency, such as an economic downturn or natural disaster. They also help determine how quickly cash flow problems can be resolved once they happen, so there is no disruption in service delivery.
Bottom Line
Stress Testing is a great way to mitigate risk and ensure that your business is prepared for any crisis. The five steps outlined above are the essential parts of this process, but there are many other considerations. Stress testing should be something every company incorporates into their risk mitigation strategies because it allows them to identify weaknesses in their business model before it becomes too late.
Who am I?
I am Dotun Adeoye, a Business Growth Strategist & Author of the 5 Pillars of Business Growth.
I’ve built up my experience via serial entrepreneurship, consulting leadership roles in business growth, business development and product innovation in large companies worldwide in the last 29 years.
Today, I consult with large businesses on how to sustainably grow their businesses, sustain infinite growth, ensure business continuity and achieve a legacy.
Hire Dotun Adeoye to Speak Virtually or In – Person at your company’s event to cover this or other topics. You can also get in touch via +44 203 097 1718
