> For the complete documentation index, see [llms.txt](https://help.modelreef.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://help.modelreef.io/how-tos/scenarios-and-planning/build-a-stress-test-downside-case.md).

# Build a Stress Test / Downside Case

This guide shows how to build a structured downside or stress case in Model Reef by creating a separate model with pessimistic but plausible assumptions and then reviewing its impact on cash and valuation.

***

## Before you start

You should have:

* A Base Case model that you believe is realistic or slightly conservative.
* Key financing structures modelled, including debt terms and any covenants you track.
* A view on what constitutes a plausible downside, for example demand shocks or margin compression.

If financing is not yet modelled, see:

* **Build a Capital Structure Model**
* **Build a Debt Schedule and Covenants Model**

***

## What you will build

* A dedicated downside model with:
  * Lower revenue or unit growth.
  * Weaker pricing or higher direct costs.
  * Potentially higher Opex or delayed cost savings.
* A view of stress impacts on:
  * Cash and working capital.
  * Leverage and coverage metrics.
  * Valuation and investor returns.

***

{% stepper %}
{% step %}

### Step 1: Identify downside drivers

Decide which assumptions you want to stress, for example:

* Revenue and volume:
  * Slower customer growth.
  * Higher churn.
* Pricing and margin:
  * Discounting to maintain volume.
  * Supplier cost increases.
* Operating costs:
  * Delayed cost reduction programmes.
* Funding conditions:
  * Higher interest rates.
  * Less flexible refinancing options.

Write down a narrative for the downside scenario so changes are coherent.
{% endstep %}

{% step %}

### Create a downside model from the Base Case

* Duplicate the Base Case model.
* Rename it clearly, for example:
  * `Company - Scenario - Downside` or `Company - Stress Test`.
* In the new model, adjust assumptions according to your downside narrative.

Try to keep the changes structured rather than random, so the scenario tells a clear story.
{% endstep %}

{% step %}

### Adjust revenue and margin drivers

In the downside model:

* Reduce growth in unit or customer drivers.
* Introduce or increase churn where applicable.
* Modify pricing and cost per unit drivers to reflect:
  * Discounting.
  * Supplier price increases.

Check that revenue and gross margin paths reflect a materially weaker environment compared with the Base Case.
{% endstep %}

{% step %}

### Adjust costs, capex and working capital if relevant

Depending on your narrative:

* Increase Opex in the near term if cost cutting is delayed.
* Reduce or delay growth capex if expansion plans are scaled back.
* Loosen working capital terms if customers pay later or stock levels rise, by increasing delays and inventory-like behaviour.

The aim is not necessarily to make all assumptions worse, but to build a realistic pattern of how management might respond under stress.
{% endstep %}

{% step %}

### Examine cash, leverage and coverage

With the downside assumptions in place:

* Open **Cash Waterfall** and **Cashflow Statement**:
  * Look for periods where cash becomes negative or dangerously low.
  * Check Change in Net Working Capital to see how much cash is tied up.
* Review Balance Sheet metrics:
  * Net debt.
  * Leverage ratios if you track them.
* Review coverage metrics in any debt or covenant dashboards you maintain.

This shows whether the business can survive or what mitigating actions might be needed.
{% endstep %}

{% step %}

### Interpret valuation in the downside

Open the **Valuation** outputs for the downside model and compare to the Base Case:

* Project NPV and IRR.
* Equity NPV and IRR.
* Money Multiple.
* Payback period.

Consider whether:

* Investor returns remain acceptable under downside.
* The deal or strategy is still attractive given the risk profile.

You may choose to track both Base and Downside valuations as part of decisions around fundraising or acquisitions.
{% endstep %}
{% endstepper %}

***

## Check your work

* The downside model is fully consistent and balanced.
* Differences from Base Case are deliberate and traceable.
* Cash trajectory and leverage look materially more pressured than in Base Case.
* Valuation metrics reflect the increased risk and weaker performance.

***

## Troubleshooting

<details>

<summary>Downside assumptions are too extreme</summary>

Tighten ranges so you are modelling a severe but plausible scenario rather than a total failure state, unless that is what you want to test.

</details>

<details>

<summary>Downside still looks too good</summary>

Revisit drivers and check whether customer loss, margin compression and cost rigidities are all fully reflected.

</details>

<details>

<summary>Stakeholders misinterpret downside as new forecast</summary>

Label the model clearly and document that it is designed for stress testing rather than as a central expectation.

</details>

***

## Related guides

* [Franchise Networks (Franchisors & Franchisees)](/use-cases/franchise-networks-franchisors-and-franchisees.md)
* [Aggregate Categories](/help/building-your-model/aggregate-categories.md)
* [Amortisation](/help/financial-outputs-and-valuation/amortisation.md)
* [Common Size Mode](/syntax/chart-and-table-syntax/common-size-mode.md)