Houston, TX, January 09, 2012 --(PR.com
)-- Now is the time
Uncertainty abounds. Crude oil prices are likely to remain high to support inflated Middle Eastern budgets, according to the Zawya news service.. European Union members risk default with each new bond issue, per the New York Times. Congressional posturing in an election year promises continued inaction by our elected leaders, according to the Huffington Post. Macroeconomic shocks could be unveiled at any time.
Kevin Boyle says that, "Now is the time to consider stress testing your P&L."
Stress testing is an exercise normally associated with banks. However, since the recession of 2008-2009, other companies have been performing stress tests on their financial statements. Some major corporations state in the notes to their financial statements that they have stress tested their results.
Stress testing is not simply constructing a worst case scenario. The process of stress testing creates a scenario involving a possible, but not probable macroeconomic shock. The effects of this shock are then translated into affects on variables relevant to company performance. The new value of these key variables is then reflected in a company’s financial statements, revealing the condition of the operation as a reaction to the macroeconomic shock. For banks, the variables are very well defined, but for commercial and industrial operations, the affected variables are up to the company to identify and gauge properly.
The value of stress testing for companies is clear. If a company can foresee what their P&L will look like in the event of some macroeconomic shock ahead of the occurrence, they have the luxury of adjusting their current financial and market position to weather that shock while continuing to pursue promising investments under normal conditions. Advantageously positioning long term debt, building short term financing facilities, adjusting product lines, refining geographic presence, structuring supply chains, and establishing contingency plans to deflect risk and take advantage of opportunities are all potential consequences of stress testing.
Scenario Testing is similar to stress testing. In the case of scenario testing, the company has identified risks to their annual plan, usually during the construction of their worst case. These risks are normally more focused and may include lower revenues, higher interest rates, or investments that produce subpar returns. If companies do not move the results of the scenario test to their P&L or to other areas of the business that would likely be affected the measured effects of the worst case scenario are incomplete.
Stress testing involves the development of a macroeconomic stress beyond the control of the company—oil spiking to $200 per barrel for example. The stress testing process Kevin L. Boyle, Consulting uses for an individual company involves:
· Development of a macroeconomic scenario that is possible, but not probable,
· A statistical determination of the effects of the macroeconomic stress on the company’s business,
· A bottom-up translation of the stress scenario into tangible affects on the company,
· A determination of the behavioral characteristics of the line items affected,
· Running simulations to determine the possible inputs to the company’s financial and operational results,
· The formulation of reactions and strategic/contingency plans to counter the effects of the stress scenario,
· The development of metrics to “foretell” the impending actualization of stress scenarios
Kevin L. Boyle, Consulting follows a similar course for scenario testing except that the risks are probable. Scenario testing can also be applied on a smaller scale to annual plans, projects and investments, and even product lines. On a large scale, the results of scenario testing may be pro forma P&Ls. A more focused approach yields risk mitigation measures that are immediately actionable.
Kevin L. Boyle, Consulting, has developed an expertise in applying Stress Testing and Scenario Testing, drawing from many different resources. Experience garnered at the highest academic level of applying bank stress testing techniques to commercial enterprises. Practical scenario testing experience from decades of leading new business development efforts, acquisitions, and project management.
Kevin L. Boyle, Consulting, has carefully constructed macroeconomic scenarios both possible, for stress testing, and probable for scenario testing. Given the uncertainty in the near future environment, now is the time to stress test your P&L, or scenario test your annual plan or project.