Financial Stress Test Calculator

A financial stress test models what happens to profit and cash when revenue falls, holding the cost structure fixed. The calculator applies a revenue drop, scales variable costs down with the lower revenue, leaves fixed costs where they are, and reports the stressed annual profit or loss. Where the result is a loss it also converts the cash reserve into a runway in months. It answers one question: at this cost structure, how far can revenue fall before the business stops covering its costs, and how long does the cash last after that.

The loaded figures work through cleanly. Revenue of 10M falls 20% to 8M. Variable costs at 40% of the stressed figure are 3.2M. Fixed costs stay at 4M. Stressed profit is 800,000, so the business absorbs a 20% fall and stays profitable. A second figure sits just past it: at this cost structure the break-even revenue drop is 33.33%. A 30% fall still leaves 200,000, a 40% fall produces a loss of 400,000 and the 500,000 reserve covers 15.0 months, and a 50% fall produces a loss of 1,000,000 with 6.0 months of runway.

What sets that break-even point is the split between fixed and variable costs, not the size of the business. At the defaults the contribution margin is 60% of revenue, so unstressed profit is 6M of contribution less 4M of fixed costs, or 2M, which is a degree of operating leverage of 3.0: each 1% of revenue lost takes 3% of profit. The break-even drop is the reciprocal of that figure. Raise fixed costs to 6M and the same 20% fall turns 800,000 of profit into a loss of 1,200,000 with 5.0 months of runway; cut them to 2M and the same fall leaves 2.8M. Supervisory frameworks apply the same logic to banks, where stress testing is a formal requirement rather than a planning exercise.

A worked example

Revenue of 10,000,000 falling 20% gives stressed revenue of 8,000,000. Variable costs at 40% of that are 3,200,000, fixed costs stay at 4,000,000, and stressed annual profit is 800,000. The cash reserve of 500,000 is untouched, because a profitable scenario needs no runway.

Deeper drops change the picture in steps. At the break-even drop of 33.33% profit reaches zero. At 40% the loss is 400,000 against a 500,000 reserve, which is 15.0 months. At 50% the loss is 1,000,000 and the runway falls to 6.0 months. At the maximum 80% the loss is 2,800,000 and the reserve covers 2.1 months. The runway shortens faster than the drop deepens, because the loss grows while the reserve does not.

What moves the number most

Four of the five inputs move the headline figure, and they move it by different amounts. Each additional percentage point of revenue drop costs 60,000, since it removes 1% of revenue at a 60% contribution margin. Each percentage point added to the variable cost share costs 80,000, because it applies to the full stressed revenue of 8M. Fixed costs move the result one for one, so 40,000 more fixed cost is 40,000 less profit. A 1% rise in current revenue adds 48,000.

Cash reserve is the exception: it does not enter the profit calculation at all. It only converts a loss into a runway, so changing it moves the Cash Survival row and leaves the headline number where it was. That also means a large reserve is not a substitute for the cost structure. At a 50% drop the reserve buys 6.0 months whatever the balance sheet looks like elsewhere.

The formula behind this

Stressed revenue is current revenue times one minus the drop. Variable costs are that stressed figure times the variable cost percentage. Stressed profit is stressed revenue less variable costs less fixed costs. Where profit is negative, cash survival in months is the reserve divided by the annual loss, multiplied by twelve, which is the reserve divided by the monthly burn.

Two shortcuts follow from the same algebra. The break-even revenue drop is one minus fixed costs divided by contribution, which at the defaults is one minus 4M over 6M, or 33.33%. The degree of operating leverage is contribution divided by unstressed profit, 6M over 2M, or 3.0, and the break-even drop is its reciprocal. Both hold only while the cost split stays as entered, which is the model's central assumption and the first thing that changes in a real downturn.