How to conduct a quick business 'stress test' to help strengthen your company's finances during the pandemic

• Nev Harris is a speaker and marketing expert who helps entrepreneurs better understand and take control of their business finances.
• For owners facing setbacks during the pandemic, Harris recommends conducting a business stress test to analyze the overall financial health of your company, gain control over cash flow, and prepare for a worst-case scenario.
• Doing so will help you prioritize the most important expenses and provide peace of mind that you're prepared for any situation.

Many business owners are in a stage of uncertainty right now amid the coronavirus pandemic. They're wondering if the economic shutdown will become a prolonged recession, and if they'll have the money to survive whatever happens.

Since we don't have a crystal ball or a COVID-19 vaccine, this is largely out of our control. However, business owners do have the ability to know and take control over the financial health of their business. The first step to that is to perform what I call a business stress test. This will give us a good look at the financial health of our business if some of those less ideal outcomes come true.

I know for a lot of us it's more comfortable and less scary to not do what I'm going to share. We may find out something that paints an unpleasant picture. But the future is going to happen no matter what. Acting like an ostrich and burying your head in the sand doesn't serve you — it actually will hurt you. Right now, we have a chance to do something about it, and gain more control over our cash flow so that whatever happens next, we can be prepared for it. Even better, by performing a business stress test, we can discover that even if the worst-case scenario occurs, we can easily weather it. There can be a lot of peace of mind in knowing your financial situation and being ready.

How to conduct a business stress test

The purpose of this exercise is to see how long you can stay in business if you don't get any new customers or clients. This is a worst-case assessment and not at all likely, but it is very useful to know what you would need to prepare for.

Grab a piece of paper, a whiteboard, or your favorite spreadsheet program. First, make three columns.

In the first column, list all of the recurring revenue you have coming in every month. This will be contractually obligated payments from your existing clients.

In the second column, list all of your monthly expenses.

In the third column list, the money you're owed for work you've done and the amount of cash in your bank account.

Now add up the first column, which is your total monthly income. Next, add up the second column, which is your total monthly expenses. Finally, add up the third column, which is your cash flow and money that will become cash shortly.

If the difference between your recurring revenue and your expenses is positive, you know that you can continue to run your business with the amount of revenue currently oming in. In other words, this means you have more recurring revenue than expenses, and you'll be able to meet all of your bills. You're in a great position to pull through whatever happens.

But if the number is negative, that means your recurring revenue doesn't cover all of your monthly expenses, and you'll need to find more money. For this, you have a few options. You can cut your expenses, get a loan, find more business, or you may even have cash in the bank that you can pull out to help cover the gap.

If the gap is large because you don't have a lot of or any recurring revenue, now is the time to start building recurring revenue streams into your business. If other companies can turn sneakers, razors, and website design into a recurring business, there is a way to do it in your own business — you just have to get creative. Covering your costs with recurring revenue can lift a huge amount of stress off your shoulders.

A sample business stress test:

Although it can be a stress-inducing exercise in the moment, knowing these numbers makes the future less stressful because you know where you stand and what you need to do moving forward.

Once you know your expenses, prioritize which are the most important

Now that you've done the stress test, you know if and when you're going to run out of cash. Now, it's time to develop a plan for what to do at that point in time. Think of it as an 'in case of fire break glass' scenario. The plan is pretty simple and easy to create.

Start by prioritizing your expenses so you know which you could put off for a little bit and which you're going to have to pay immediately. Prioritizing makes you aware of which expenses are the most important and which have some wiggle room. For example, if you miss a payment on a loan or a credit card, you'll be charged a late fee, your interest rate will skyrocket, and it will damage your credit report. Those kinds of payments need to be made an absolute priority.

An electricity bill is slightly different. If you miss a payment, you may get a slight late fee, but they're not going to turn off your electricity for a while — it will take many missed payments before that happens. You may have some room to make that payment later without devastating and long term effects, if it can be made a lower priority. Our overall goal is to never be in a situation like this, but the COVID-19 crisis has shown us that things happen that we can't predict.

This is not an ideal way of managing money, nor a long-term fix, but it is a helpful way to look at the worst-case scenarios. Having a plan in place gives us a sense of security, and can help us to stress less over what might potentially happen, because we're prepared.

Why conducting a stress test is important for your business

In turbulent economic times, we can't control what's happening around us or with our clients. But we can take a look at our own numbers, and decide what to do from there. Confronting the worst-case scenario and preparing for it, both mentally and financially, will help set you up for long-term success, no matter what comes your way.

Nev Harris is an agency owner who teaches people how to understand their money and how to use it as a tool to grow their business. He helps agencies, small business owners, and freelancers make sense of their financial statements, get over the fear of knowing the financial health of their business, and learn the language to empower them to make better decisions. Harris is a graduate of the University of Pittsburgh and Duquesne University, and holds a Bachelor's in economics and an MBA in finance.