Why profit falls faster than revenue
When revenue drops, variable costs like materials and card fees fall with it, but fixed costs like rent, salaries and insurance do not. Gross profit falls in proportion to revenue, and because fixed costs stay put, what is left after them shrinks by a much larger percentage. Funding payments behave like a fixed cost.
Example: a business with $150,000 of monthly revenue, a 40 percent gross margin and $45,000 of fixed costs keeps $15,000 before funding payments. A 20 percent revenue drop cuts gross profit to $48,000 and cash left to $3,000. Revenue fell 20 percent; cash left fell 80 percent. Illustrative figures.
Step 1: Separate fixed and variable costs
Go through your expenses and mark each as variable, moving with sales, or fixed, staying roughly the same regardless of sales. Some costs are partly both. Your gross margin captures the variable costs; everything else, including existing and proposed funding payments, belongs in fixed costs for the test.
- Usually variable: cost of goods, materials, card processing fees, sales commissions, shipping
- Usually fixed: rent, salaried payroll, insurance, software, equipment payments, funding payments
- Partly both: hourly labor you can reduce with notice, utilities, marketing
Be honest about what you could really cut, and how quickly. A cost you could reduce in three months does not help in the first month of a drop.
| Revenue drop | Revenue | Gross profit | Cash left before payment | Cash left after fixed payment |
|---|---|---|---|---|
| None | $150,000 | $60,000 | $15,000 | $9,000 |
| 10% | $135,000 | $54,000 | $9,000 | $3,000 |
| 20% | $120,000 | $48,000 | $3,000 | −$3,000 |
| 30% | $105,000 | $42,000 | −$3,000 | −$9,000 |
Step 2: Run three scenarios
Recalculate cash left after fixed costs and the proposed payment at several levels of revenue drop, such as 10, 20 and 30 percent. Also run your worst actual month from the past few years. The scenario where cash left turns negative shows how much room you really have.
Cash left after payment = revenue × (1 − drop) × gross margin − fixed costs − funding payments
Example: with a $6,000 monthly payment, the business above keeps $9,000 at normal revenue, $3,000 after a 10 percent drop, −$3,000 after a 20 percent drop and −$9,000 after a 30 percent drop. The table shows each step. Illustrative only.
Step 3: Count months of runway
If a scenario produces a monthly shortfall, divide your cash reserve by that shortfall to see how many months you could keep paying before the reserve runs out. Compare that with how long a downturn could realistically last in your business, based on your own history.
Months of runway = cash reserve ÷ monthly shortfall
Example: with a $20,000 reserve, a 20 percent drop that creates a $3,000 monthly shortfall gives about 6.7 months of runway. A 30 percent drop creating a $9,000 shortfall gives about 2.2 months. Illustrative figures. If a slow season in your business usually lasts three months, the 30 percent scenario is a real risk.
Fixed payments versus a percentage of sales under stress
A fixed payment stays the same when revenue falls, so it fully adds to the squeeze. A remittance set as a percentage of sales falls with revenue, which softens the hit in slow months. The trade-off is that repayment takes longer, and the total owed does not change.
Example: a remittance of 4 percent of revenue equals $6,000 at normal sales. After a 20 percent drop, it falls to $4,800, leaving −$1,800 instead of −$3,000 with the fixed payment. After a 30 percent drop, it leaves −$7,200 instead of −$9,000. Illustrative only. See revenue-based financing for how remittances work.
What to do if your plan fails the test
If a realistic drop makes the payment unaffordable, change the plan before you sign. Borrow less, build a reserve first, choose a structure that flexes with sales, or accept a longer term knowing it usually raises total cost. If you already carry a payment that fails the test, some owners look to lower your payment by stretching the term.
- Reduce the amount until the payment passes a moderate drop
- Set aside a reserve covering several months of shortfall
- Identify costs you could cut quickly, and how much
- Compare a percentage-of-sales structure with a fixed payment
- Wait until revenue or reserves are stronger
To size a payment that passes, work through how much funding your business can afford and how much revenue can safely go to payments. Seasonal examples are on retail and home services.
Frequently asked questions
Why does profit fall faster than revenue?
Because fixed costs such as rent, salaries, insurance and funding payments stay the same while revenue drops. Gross profit falls in proportion to revenue, but the fixed costs still have to be covered from it, so the cash left over shrinks by a much larger percentage than revenue does.
Which costs can I cut quickly in a downturn?
Usually variable and discretionary costs: materials ordered to match sales, some marketing, overtime and hourly labor you can schedule down. Fixed costs like rent, salaried staff and equipment or funding payments are hard to change quickly. Mark which costs you could really reduce within a month.
How big a drop should I test?
There is no standard figure. Test several levels, such as 10, 20 and 30 percent, and add your worst actual month from recent years. If your business is seasonal, test your slowest season. The goal is to know where the payment stops fitting, not to predict the future.
Do percentage-of-sales payments pass stress tests more easily?
They usually soften the hit, because the remittance falls when sales fall. In an illustrative case, a 20 percent drop left more cash with a percentage remittance than with a fixed payment. The trade-off is a longer repayment period, and the total owed stays the same.
What should I do if my plan fails the test?
Change the plan before signing: borrow less, build a reserve first, choose a structure that flexes with sales, or wait. A longer term lowers the payment but usually raises total cost. If an existing payment fails the test, some owners look to lower their payment by stretching the term.
Passed the stress test? Apply once
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Updated September 14, 2026 · Roifunder Funding Team