Module Summary
The Sustainable Cashflow Formula — the essence of it, in two minutes.
The Sustainable Cashflow Formula is a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period. It gives every business owner a structured, repeatable way to answer the one question that determines their financial exposure — and BusinessSolvency automates it.
Sole traders and partnerships carry direct personal liability from day one: every business debt is already personal debt, with no separate legal entity in between and no regulator watching the pathway before a lender or creditor moves. (Where a business is incorporated, this same exposure is codified instead as a company director's personal liability for insolvent trading under Section 588G, monitored under ASIC's RG 217 — see Chapter 2, Section 2.1 for why that split is incorporation, not business size.) Whichever structure applies, the same question decides the outcome: can this business always pay what it owes? See The Problem for the full picture of who's exposed, and how.
Cash In − All Obligations − Unexpected Events Provision = Solvency Adequacy Score
- Cash flow is the survival metric, not profit.
- All obligations count — debt, tax, drawings, growth capital.
- A cash buffer for the unexpected is mandatory, not optional.
- Forward-looking monitoring must be documented. No record, no way to catch a problem while it's still fixable.
| # | Component | Tests whether… |
|---|
| 1 | Operating Cash Flow Surplus | operations generate more cash than they spend |
| 2 | Equity Adequacy | assets exceed liabilities |
| 3 | Business Debt Coverage | operating cash can service all debt |
| 4 | Personal Obligation Coverage | drawings don't starve the business |
| 5 | Tax and ATO Obligations | tax and super are met on time |
| 6 | Growth Working Capital | growth is funded before revenue arrives |
| 7 | Unexpected Events Provision | a reserve exists for a genuine shock |
| 8 | Cash Flow Breakeven | the true survival revenue threshold |
Traditional reportingHistorical. Tells you what happened last quarter — often too late to act.
Management forecastsPrepared by the same people being assessed. Subject to optimism bias. Not independent.
The Sustainable Cashflow FormulaIndependent, structured, forward-looking — and produces a documented record an owner or board can stand behind.
DSCR (the metric banks use)Tests only whether operating cash covers debt repayments — ignores drawings, ATO obligations, and reserves. A business can pass DSCR while draining its reserves every period. See
The Debt Cycle for the full DSCR breakdown and real case studies.
The Sustainable Cashflow FormulaIndependent, structured, forward-looking, includes every obligation, and produces a documented record.
The research remains open for critique. The full framework and automated calculation are a feature of paid BusinessSolvency access, for companies, sole traders, and partnerships alike.
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"Most owners don't see it coming. The Sustainable Cashflow Formula means you will."
— The principle behind ten years of independent research
Over seven years of research and iteration, I developed what I call the Sustainable Cashflow equation. It is deceptively simple but structurally different from anything in standard financial practice. In plain terms, the Sustainable Cashflow Formula is a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period.
Revenue IN cashflow = or > cashflow OUT including business expenses + capital loan repayments + private loan repayments and any net private costs + reserve needed for operations.
The Sustainable Cashflow Formula — Sustainable Cashflow Manual, January 2025
The critical difference from a profit plan is the inclusion of capital repayments, private drawings, and reserve requirements. These are cash obligations that do not appear on a profit and loss statement. A business can show a healthy profit and still be insolvent because it cannot meet these commitments. The revenue breakeven point for cashflow sustainability is almost always substantially higher than the revenue breakeven point for accounting profit.
When the cash balance at the start and end of a trading period is equal, the business is at cashflow breakeven. When it is less, the business is in deficit — and each deficit period erodes the reserves that protect against the next crisis.
The Question Every Business Must Answer
One question. Every review. No exceptions.
Sole traders and partners carry direct personal exposure from the outset — every dollar the business owes is already owed by them personally, with no company structure in between to absorb it. (Where a business is incorporated, company directors carry the same exposure a different way: personal liability for insolvent trading under Section 588G, with ASIC's updated Regulatory Guide 217 requiring active, continuous, independent monitoring.) Yet most business owners, of any structure, have no structured framework for answering the question that determines their exposure.
The Sustainable Cashflow Formula — The Balanced Cashflow Test
"Does this business generate sufficient cash in every trading period to pay all its obligations and keep trading sustainably — with a buffer for the unexpected?"
This is not a theoretical question. For a sole trader or partner it is a direct, personal-asset one — arguably faster-moving than the company case, since no regulator sits between the business and a creditor's next move. (For a company director, the same question is a legal one, framed by Section 588G.) Either way, an owner who cannot answer it — with evidence — is exposed the moment the cash actually runs short.
You can't claim you didn't know.
Australian courts have consistently held that ignorance of a company's financial position is not a defence to insolvent trading — and for a sole trader or partnership, there's no separate entity to even make that argument to. The Sustainable Cashflow Formula gives every business owner the structured framework to ensure they always know — and can prove it.
Four Key Principles
The framework that changes everything for business owners.
The Sustainable Cashflow Formula is built on four interlocking principles — each derived from the legal and financial pathway a business follows toward insolvency, and the pattern of Australian business closures analysed over ten years of independent research.
01
Cash flow is the survival metric — not profit
A profitable business can still be insolvent. The Formula measures cash obligations against cash in — not accounting profit against accounting expenses. Cash in must exceed cash out in every trading period for the business to remain solvent.
02
All obligations must be included — not just operating costs
Most cash flow forecasts miss debt principal repayments, tax obligations, personal drawings, and growth capital requirements. The Formula requires all obligations to be counted — because creditors count all of them.
03
A buffer for the unexpected is not optional
Businesses that survive downturns are not necessarily more profitable — they have more cash reserves. The Formula's Unexpected Events Provision formalises the buffer requirement as a governance obligation, not a management preference.
04
Forward-looking monitoring must be documented
Historical financial statements tell an owner where the business has been. The Formula requires forward-looking solvency forecasts at every review — and a documented record that the assessment was made. Without documentation, a problem caught late is a problem caught too late.
The Eight Components
Eight indicators. One integrated solvency assessment.
At its heart, the Sustainable Cashflow Formula is a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period. The eight structured components below turn that single test into a complete, review-ready solvency assessment — each addressing a distinct dimension of financial sustainability every business owner needs to monitor.
01
Operating Cash Flow Surplus
OCFS — Core Trading Viability
Does the business generate more cash from operations than it spends? This is the foundation — without a positive operating cash surplus, no other component can compensate.
What this requires: Verify at every review that cash from operations exceeds cash costs of operations.
02
Equity Adequacy
EA — Balance Sheet Test
Does the business have positive net equity — assets exceeding liabilities? A declining equity position, left unaddressed, is a solvency warning sign requiring immediate action.
What this requires: Review the balance sheet at every check-in. A negative equity trend must trigger a deliberate response, not a shrug.
03
Business Debt Coverage
BDC — Debt Serviceability
Can the business service all its debt obligations — principal and interest — from operating cash flow? Debt that cannot be serviced from operations is a solvency risk, not a balance sheet item.
What this requires: All debt repayment schedules must be included in cash flow forecasts — not just interest costs.
04
Personal Obligation Coverage
POC — Owner Drawings
Are personal drawings and owner obligations adequately covered by operating cash flow? Personal obligations compete directly with business obligations for the same cash pool.
What this requires: Personal drawings must be formally decided on and included in cash flow forecasts — never assumed.
05
Tax and ATO Obligations
TAO — Compliance Obligations
Are all tax obligations — income tax, GST, PAYG, superannuation — included in the cash flow forecast and being met on time? ATO debt is a leading indicator of insolvency in Australian businesses.
What this requires: ATO obligations must appear in every cash flow forecast and be reviewed regularly. Superannuation guarantee charges carry personal liability regardless of structure.
06
Growth Working Capital
GWC — Growth Viability
Does the business have adequate working capital to fund approved growth strategies before new revenue arrives? Growing businesses fail at higher rates than stable ones — because growth consumes cash before it generates it.
What this requires: No growth strategy should be taken on without assessing working capital adequacy for the full growth cycle first.
07
Unexpected Events Provision
UEP — Resilience Buffer
Does the business maintain a cash reserve sufficient to absorb an unexpected adverse event — loss of a major customer, equipment breakdown, legal dispute, or economic shock — without becoming insolvent?
What this requires: Set a minimum reserve level and verify it is maintained. A business with no buffer has no margin for error.
08
Cash Flow Breakeven
CFBE — The Survival Threshold
At what revenue level does the business cover all its cash obligations? This is the Sustainable Cashflow Breakeven — the true survival threshold, not the accounting breakeven. Every business owner should know this number.
What this requires: Know the business's cash flow breakeven and monitor actual cash in against it every trading period.
Why Existing Approaches Fail Business Owners
The gap between what owners receive and what they need.
Traditional financial reporting gives business owners historical data. Management or self-prepared forecasts give owners optimistic projections. Neither gives owners what they actually need — an independent, structured, forward-looking solvency assessment they can act on with confidence.
Traditional reporting
What happened last quarter
Historical financial statements. Profit and loss. Balance sheet at a point in time. Useful for accounting — insufficient for solvency monitoring. By the time the problem appears in the financials, it is often too late.
Self-prepared forecasts
What you want to happen
Prepared by the same person or team whose performance is being assessed. Subject to optimism bias. Rarely include all obligations. Not independent. Relying solely on your own forecasts leaves real exposure unaddressed.
The Sustainable Cashflow Formula
What every business needs to know
Independent. Structured. Forward-looking. Includes all obligations. Produces a documented record. Gives every business owner, whatever the legal structure, the evidence they need to act early.
The Research Behind the Formula
Ten years. Multiple closures. One honest question.
Why this formula exists
The Sustainable Cashflow Formula was not developed in an academic institution. It was forged in personal experience. Stephen Fairbairn experienced multiple business closures due to cash flow crises — including the closure of a promising startup during a severe economic downturn when rising interest rates and insufficient cash reserves made it impossible to continue trading.
The formula emerged from a simple, honest question: what would have needed to be true for these businesses to survive? The answer, consistently, was not more revenue or better products. It was sufficient cash coming in above all obligations, every trading period, with a buffer for the unexpected.
From that personal experience came ten years of research — from 2016 to 2026 — culminating in an Excel workbook prototype tested across real Australian business data, and ultimately in two purpose-built platforms implementing the Sustainable Cashflow Formula: BoardSolvency for company boards, and BusinessSolvency for the broader Australian SME sector — companies, sole traders, and partnerships alike.
The formula is available to paid BusinessSolvency clients. The research remains open for critique. The platform makes it automatic.
Stephen Fairbairn · Independent Researcher · Noosaville, Queensland · 2026 · stephenfairbairn@outlook.com
Research Note — Working Paper — Available to Paid BusinessSolvency Clients
The Sustainable Cashflow Formula: Theoretical Basis, Development, and Application
The Sustainable Cashflow Formula's full framework and automated calculation are made available to paid BusinessSolvency clients. BusinessSolvency is the platform that implements it — automating the calculations and making it accessible to every business regardless of size, structure, or resources.
The formula addresses a recognised gap: no structured framework exists that translates the legal and financial reality every business owner already faces — direct personal exposure for sole traders and partners, or the company-director obligation under Section 588G and ASIC RG 217 where the business is incorporated — into a practical, repeatable test anyone can apply, without needing an accounting background. This working paper will be refined through application and peer review. Contributions from business owners, practitioners, academics, and regulators are genuinely welcomed.