Many financial models will be being stress tested right now, with assumptions being included which no one ever dreamt of.
It is always a good idea to include stress cases in models and not just as a reaction to serious world events.
Stress cases should test a combination of downsides of all the major assumptions. They should trigger overdrafts, lack of finance and default.
When building a model, I recommend switching continually between a base case and a stress case. A stress case is a very good way of highlighting modelling errors which may well not be picked up if only a base case and minor variations are run.
Here are some of the areas which should be tested with a stress case:
- Loan capping
- Overdrafts / revolving credit facilities
- Tax losses
- Dividend payments
- Interest on cash balances and overdrafts
- Ratios
- Default triggers
Many a modelling error has been missed because of a lack of robust sensitivity testing. Therefore, remember to set up stress testing and check that the figures and results make sense.