Financial Distress Test - Know what to improve

A business in distress is one where the is a likelihood that the company may reach a position where it won't be able to pay its debts and trade creditors as they become payable within the immediately ensuing 6 months.

Generally, this is caused by high fixed costs, many illiquid assets and revenues that are sensitive to economic downturns.

Furthermore, an entity becomes technically insolvent once its liabilities outweigh its assets.

To address the financial stability issues, it is good practice to do regular "Financial Stress Tests". Regular financial stress tests enable decision makers to take proactive measures as opposed to being reactive which is often when it is too late to be able to do anything.

If you want to ensure there is always a prospect of rescuing your business should it be in distress, then financial stress tests is where it all starts.

Frequently Asked Questions

Why must I do a financial stress test?

The process enables business owners to gauge how their companies would perform in difficult financial situations.

How do you do the Financial Stress Test?

Draw up a spreadsheet where you compare the following:

Here's the formula: A - B + C + D

• A - total income
• B - total expenses
• C - debtors
• D - company cash in the bank

If the result of that formula is a negative cash flow figure, then your company is in trouble and should have a strategy in place to mitigate going further into financial distress.

What are the main questions to ask in a financial stress test?

1. Do you have enough resources to sustain the business for the next 2 years?
2. Are there any threats to the business and its survival?

How do I deal with financial distress in the business?

• Cut back expenses as far as possible
• Institute a hiring freeze
• Negotiate a longer payback period with your creditors
• Improve your marketing and promotion to attract new business
• Develop new offerings to tap into other markets
• Secure credit lines as a back up to your cash flow plan should your bank account run low
• Watch your working capital closely

Do you need a Quote for our Tax and Accounting Services?

Contact our team via any of the following channels to get a proposal for your accounting and tax services:

• Complete Individual proposal request form
• Complete Company, Micro Business or Small Business proposal request form
• Complete Trust proposal request form
• Book a video or telephone call
• Complete this contact form for a call back

Subscribe to our newsletters.

Disclaimer: 

The views or opinions expressed on this site are solely those of the original authors and other contributors. The material and information contained on this website is for general information purposes only.

This information is for general purposes only. Don't use this information for making business, legal and tax decisions without consulting a professional.

We do not make any express or implied representation, as to the completeness or accuracy of the information published.

Tax law changes regularly, and any tax information on this site might be outdated.

Links to this website may lead to other websites outside our control and we accept no liability in respect thereof.

ZPA accepts no liability for any loss or damage arising from the use of any material on this site.