Entrepreneurs should stress-test their ideas weather just starting a business or developing it.
What is a Stress Test?
Stress testing is a simulated technique to analyze the impact of scenarios or shocks on the well being of businesses. The purpose of the stress test is to investigate if the business can withstand a "shock" or development in the market in the areas of technology / product, macroeconomic / political, financial and more.
"What if" Scenarios
While it is very exciting to plan your business based on "good" market conditions, entrepreneurs do not have any control over how the market may actually behave in the future. Hence, considering the impact of a shock into your analysis is key, while developing the business idea and onwards.
External macroeconomic conditions can create opportunities just like they can create challenges for business. Negative external conditions, Covid Pandemic for example, can have a devastating impact on businesses. Performing the analysis allows to identify potential vulnerabilities, potential inflection points, to then decide if the idea is good or need reconsidering.
So, are you ready to put on those dark sun glasses and analyze "what if" scenarios? what if a new product, competing with yours, showed up in the market tomorrow, what if a new technology came out that rendered yours obsolete, what if a recession hit and expected demand is no longer there at the rate you expected?
Begin by designing the most probable scenarios relevant for your market, your industry, your product.
Identify Your Business Vulnerabilities
In its' simplest form a stress test can be performed qualitatively using judgment. After identifying the relevant scenarios, assess their impact into the various areas of your expected business performance, such as expected demand and revenue, cost impact if any, bottom line Profit & Loss and of course cash position.
For example, a new product, competing directly with yours, has entered the market. You expect based on this assumption that the demand for your product will be reduced by X%. Based on this initial assumption, examine the impact on various key areas of your business. If the "shock" is substantial, you would need to evaluate the impact on your business model as a whole.
Performing the analysis allows to identify potential vulnerabilities, potential inflection points, to then decide if the idea is good, if the business model is good or need reconsidering.
Take Action!
When you stress test, you identify weak points within your business. What happens if the results of the stress test demonstrate that the business cannot withstand a high probability "shock"?
This is where there is a chance to strengthen identified vulnerabilities, build resilience or form contingency plans. In the case of severe impacts, bold decisions may need to be made including exiting or seeking / increasing capital to address threats.
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