We want a Budget that is a solid foundation for our Goals. To get one, we’d be smart to stress test it. This means putting it through a variety of scenarios, which gives us, the bank, our investors, etc. more confidence that our Goals in financial terms, can weather the storms of the next year. Here are some of the benefits:
Risk/Reward Management. Sometimes things outside our control, like economic shifts or regulatory changes, or a new technology (AI, anyone?) can disrupt even the most stable business. Stress testing helps identify financial vulnerabilities, allowing companies to prepare for challenges and minimize risks before they arise. How to model this out in our Budget? We can ask ourselves,
“Self, what would happen if w lost 5% of our customers/revenue? 10%? 20%? And on the positive side: what would happen if we gained 5% more customers/revenue? 10%? 20%?”
And then we model these scenarios in the Budget.
Informed Decision-Making. In light of our stress testing, we can plan for the future. If we are trucking along towards our Goals as reflected in our Budget, we can feel more comfortable investing in new equipment; launching a new product; planning an event.
We can feel more comfortable about our strategy because we now know how our decisions will affect our bottom line.
By running our Budget through stress tests (also called “scenario casting”), we can see how our business would respond (how our Goals would be impacted) based on situations beyond our control–whether positive or negative. Our Budget becomes a vital tool–-and this saves us from both fear, and guesswork.
Reach out to us to learn more.
