Have you stress tested your business?

In our last articles, we had discussed 4 “C”’s to survive these challenging times. It should be remembered that survival must be the immediate short term strategy with revival being the next medium & long term strategies. It is to survive in the short term that many of my mentees have successfully applied the 7 “C” model with good results.

Let me reiterate the first 4 “C”s mentioned in previous articles for benefit of all. Cash, costs, communication and focus on customers. It is all about conserving cash, looking at eliminating & reducing costs and communication to all stakeholders.

In specific we also mentioned about interest as an important cost which can make a firm go bankrupt. Our analysis explicitly reveals that a business person should not expect any further reduction in interest costs at least in the near future. Our previous article outlines the reasons why we feel that interest rates will not decrease further. For those who missed that article the answer in one single word is “STAGFLATION” – Indian Economy’s growth expected to stagnate and inflation expected to go up.

Also we had also focused on the fourth “C’ i.e. Customers. Our firm recommendation was that business owners should reach out to their existing customers to sell new products. Another important recommendation and suggestion was that it is important to reach out to customers whom we had lost over the years and re-establish relations. One more alternative strategy as suggested by the great management consultant Ansoff was to reach out to new customers with existing products.

This week let us focus on the 5^th “C” which is Capital Expenditures. This is essentially taking up an implementing future growth plans. It needs to be mentioned here the two growth strategies available for a business person is organic growth and the other is inorganic growth. Organic growth strategies involve setting up new projects starting from scratch. It involves beginning from ground zero and involves a lot of time.

For example, if you wish to get into a hotel project then it will involve selection of land, getting requisite permissions and then constructing it as per one’s specifications. Here the bottleneck let me warn all of you is getting permissions. Many statutory authorities now claim that taking permission is a single window clearance. In short, a businessperson need not approach multiple authorities for projects. Unfortunately, in many cases this is not unfortunately true. So before taking up such capital-intensive projects one should do sensitivity analysis.

Sensitivity analysis is checking the viability of the project even in the worst-case scenarios. One more key management input should be shared here. Many entrepreneurs and businesspersons get so personally & emotionally attached to their new projects that they only look at the feasibility of projects. Unfortunately, even in many educational institutes the emphasis is on feasibility. I STRONGLY SUGGEST THAT APART FROM FEASIBILITY A BUSINESSPERSON SHOULD PAY EQUAL OR MORE ATTENTION TO VIABILITY OF PROJECTS.

Let me explain the difference: feasibility is whether a project can be done while viability is whether the project can be done profitably. NOTE THE KEY WORD IS PROFITS. In conclusion before going for any new capital expenditure a business person should analyse that the new project is viable even considering the worst case scenarios (this is also called stress testing of projects).

When a project passes such stress tests then one may think of proceeding else it is better to defer capital expenditure in these challenging times.

Next week we shall discuss the remaining “C”s. Until then please apply and let me know your feedback at anilrmenon1@gmail.com.

(Dr. Anil R. Menon is a business coach and has a youtube channel menonmantras where many videos are uploaded for benefit of business community and employees. Also an Instagram page by the same name menonmantras where he posts important RBI guidelines and other useful notifications)

Read the article in Malayalam