Finance | May 13

How to stress-test your next investment

Finance | May 13

How SME leaders can assess risk, challenge assumptions, and make stronger investment decisions before committing time, money, and resources

Ian Wylie Journalist, broadcaster, educator

Reading Time 5 minutes

For small business leaders, the word ‘investment’ often conjures up ideas of loans or external investment. But Damini Sharma, CEO of Coventry-based construction consultancy OM Group, says that for SME leaders, investment is much broader than taking on debt or raising finance. ‘In practice, an investment is anything that commits the business’s cash, people, time, energy, systems, or leadership focus in pursuit of growth,’ she says.

That could mean hiring senior staff, launching a new service, investing in technology, or entering a new market. Each carries different risks and that is why stress-testing matters.

Start with strategic alignment

The first step in stress-testing any investment is not financial modelling. It’s clarity of purpose. ‘For me it starts with strategic alignment,’ Sharma says. ‘The first thing I ask is whether this genuinely moves the business towards where we want to go, or whether it’s just a good idea in isolation.’ Opportunities are always available, but not all of them are right at a given moment. If an investment does not strengthen the business commercially, operationally, or strategically, it risks becoming a distraction rather than a driver of growth.

Understand the type of risk you’re taking

A key mistake many SMEs make is treating all investments the same. In reality, each type carries a different risk profile. People investments raise questions about cost, role clarity, and whether the business is ready to support a new hire. Technology investments bring implementation and adoption risks. New services require careful assessment of demand, margins, and delivery capability.

Market expansion involves understanding cost of entry and competition, while infrastructure investments require careful consideration of potential utilisation. Even marketing spend must be scrutinised for how clearly it translates into measurable return.

Across all of these, Sharma says, she returns to a core set of questions: what is the strategic purpose, what is the full cash impact over 12 to 24 months, who owns delivery, and what pressure will this put on the existing business.

Look beyond the numbers

Traditional stress-testing often focuses on financial modelling, but Neil Shepherd, senior lecturer in strategy at Lancaster University Management School, says that only tells part of the story. He describes traditional stress-testing as ‘almost exclusively a mathematical exercise’ that relies on building financial models and adjusting variables such as interest rates or sales volumes.

While useful, this approach assumes a level of certainty that no longer exists. Businesses today operate in conditions of what Shepherd calls ‘Knightian uncertainty’, where ‘the variables are unknown, the probabilities are unknowable, and the information is perpetually fragmented.’

Relying solely on spreadsheets can therefore create a ‘certainty trap’. In volatile markets, the biggest risks are often those that cannot be easily quantified. Sharma’s experience reflects this. ‘The biggest lesson for me was that risk isn’t only financial,’ she says. ‘The financial risk is usually the easiest one to model. The harder risks are operational, cultural, regulatory, timing-based, and execution-led.’

Stress-test the execution

Many investments fail not because the idea is wrong, but because execution is harder than expected. Sharma says she has seen this first-hand. Investments that looked strong on paper did not always deliver because the business lacked the people, systems, or leadership capacity to execute effectively.

As a result, she now asks a different set of questions: does the business have the capacity to deliver, is this the right time, and what pressure will it place on the existing operation.

‘The phrase I come back to is this: a good investment at the wrong time can still be the wrong decision,’ she says. Ownership is also critical. If no one is clearly accountable for delivering the return, the risk increases immediately.

Use scenarios to test resilience

One of the simplest and most effective ways to stress-test an investment is to run different scenarios. Sharma recommends three:

base case – reflects expected performance
downside case – assumes delays, higher costs or slower revenue.
stress case – considers what happens if something material goes wrong, such as losing a key client or facing market disruption. ‘If the investment only works when everything goes right, it isn’t robust enough,’ she says.

Shepherd calls for broader thinking too. He advocates qualitative scenario planning, where leaders workshop multiple possible futures and challenge their own assumptions. This process ‘unearths the biases that drive business investment decisions’ and reveals where a strategy is fragile.

Challenge your assumptions

Another powerful tool is the ‘pre-mortem’ exercise. Before committing to an investment, leaders imagine that the project has failed and work backwards to identify the reasons.

This technique, Shepherd explains, helps uncover hidden risks and counter groupthink by encouraging individuals to voice concerns that might otherwise remain unspoken.

At the same time, he warns against becoming overly cautious. Leaders should also consider the cost of inaction – that’s the risks of not investing at all. In fast-moving markets, standing still can be more dangerous than taking a calculated risk.

Test capacity as well as cash

SMEs often ask whether they can afford an investment, but not whether they can deliver it. Sharma stresses the need to assess leadership time, team capability, and operational strain alongside financial impact. In smaller businesses, where resources are limited, this is particularly important. Overloading the organisation can undermine both the new initiative and the existing business.

Ian Wylie Journalist, broadcaster, educator

Ian Wylie is a journalist, editor, and broadcaster for the Financial Times, Guardian, BBC, Monocle, and others. For 16 years he was a staff writer, feature writer, and section editor at The Guardian newspaper. He also teaches on Newcastle University’s undergraduate and postgraduate journalism programmes.

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