Glossary — Plain English Definitions

The amounts a business owes to its suppliers for goods and services already received but not yet paid for. Accounts payable is a current liability on the balance sheet — it represents money the business must pay in the short term.

The amounts customers owe a business for goods or services already delivered but not yet paid for. Accounts receivable is a current asset — but it is not cash until the customer pays. Growing receivables can signal slow-paying customers or deteriorating credit management.

The total depreciation charged against an asset from the date of purchase to the current balance sheet date. It appears on the balance sheet as a deduction from the gross value of plant and equipment, giving the net book value of the asset.

A financial statement showing what a business owns (assets), what it owes (liabilities), and the difference between the two (equity) at a specific point in time — typically the last day of the financial year. The balance sheet must always balance: Assets = Liabilities + Equity.

A financial statement showing the actual movement of cash into and out of a business during a period — from operating activities, investing activities, and financing activities. It is the primary tool for assessing solvency because it shows whether the business generated or consumed cash, regardless of what the profit figure shows.

The number of days between paying suppliers (cash out) and customers paying (cash in): stock days + customer days − supplier days. These are the days a business funds its own trading from its working capital. The operating cycle (stock days + customer days) is the whole round trip. Stock days are measured against cost of goods, customer days against sales, and supplier days against purchases from suppliers, so the days and the dollars tied up can point different ways (11.9).

The direct costs of producing the goods or services a business sells — including materials, direct labour, and manufacturing overhead. Gross profit is calculated as Revenue minus COGS. For service businesses, COGS is often called Cost of Sales.

Assets that are expected to be converted to cash or consumed within the next twelve months — including cash and equivalents, debtors, inventory, and GST receivable. Current assets are the liquid resources available to meet short-term obligations.

Obligations that are due to be paid within the next twelve months — including accounts payable, GST payable, ATO obligations, and short-term loan repayments. Current liabilities represent the short-term payment obligations a business must meet from its current assets.

Current Assets divided by Current Liabilities. A ratio above 1.0x means the business has more liquid assets than short-term obligations — it can meet its short-term debts. A ratio below 1.0x means current liabilities exceed current assets — a primary indicator of short-term insolvency risk. A ratio above 1.5x is generally considered healthy.

Net Operating Cash Flow divided by Total Debt Service (loan repayments plus interest). Measures whether the business generates enough operating cash to cover its debt obligations. A DSCR above 1.25x is the standard lender target. Below 1.0x means the business cannot service its debt from operating cash.

The annual charge against profit that reflects the consumption of a long-term asset over its useful life. Depreciation reduces profit on the income statement but is not a cash payment — the cash was spent when the asset was purchased. Adding depreciation back to net income in the cash flow statement converts accounting profit to operating cash flow.

Revenue minus all operating expenses, before deducting interest expense and income tax. EBIT measures the operating profitability of the business — how much it earns from trading before the cost of financing and taxation is applied. Auto-calculated by BusinessSolvency.

The residual interest in the assets of a business after deducting all liabilities. Equity represents what belongs to the owners — the owner directly for a sole trader or partnership, or the shareholders of a company — after every obligation has been met. Equity = Assets minus Liabilities.

Revenue minus Cost of Goods Sold. The profit remaining after direct production costs — before operating expenses such as wages, rent, and overheads are deducted. Gross profit margin is the percentage of revenue retained after direct costs.

Goods held by a business for sale in the ordinary course of business, or materials held for use in production. Inventory is a current asset — but it is not cash until it is sold and payment is received. Growing inventory can signal slow-moving stock or over-purchasing relative to demand.

Revenue minus all expenses including operating costs, interest, and income tax. The bottom line of the income statement. Net income is an accounting figure — it includes non-cash items like depreciation and does not reflect the actual cash generated by trading.

The days agreed for customers to pay your business, for your business to pay its suppliers, and the days of stock it aims to hold. Customer terms blend card and account sales: card share × card settlement days, plus the rest × account customers’ terms.

Assets recognised on the balance sheet under AASB 16 — the Australian accounting standard for leases — representing the value of the right to use a leased asset over the lease term. The corresponding liability is the lease obligation. Businesses with significant premises or equipment leases will have right-of-use assets on their balance sheet.

How many days a business takes to pay its suppliers: Trade Creditors ÷ purchases from suppliers × 365. Purchases from suppliers are cost of goods (fuel included), less any wages moved into it, plus rent, other overheads, insurance and professional fees; not wages, super, depreciation, interest or tax.

Current Assets minus Current Liabilities. The net short-term financial position of the business — the liquid resources available after short-term obligations are met. Positive working capital means the business should be able to meet its short-term obligations, provided its current assets turn into cash in time.

For a sole trader or partnership, unpaid PAYG withholding, superannuation guarantee charges, or GST are already a personal tax debt from the moment they're incurred. The ATO can pursue the individual directly for the full amount — no separate notice step, no 21-day window, and no court order required, because there's no company structure for the process to reach through first.

For a sole trader or partnership, there's no separate legal entity to trade insolvently on behalf of — debts incurred while unable to pay are simply the owner's own debts, personally, from the moment they're incurred. (The term itself is defined in company law: the act of a company incurring a debt at a time when it is insolvent, or when incurring that debt causes it to become insolvent. Under Section 588G of the Corporations Act, a director who allows this may be personally liable — provided here for context, since the term is commonly encountered.)

Under Section 95A of the Corporations Act, a business is insolvent if and only if it is not able to pay all its debts as and when they become due and payable. This is the cashflow test for solvency — it focuses on the ability to pay, not on the balance sheet value of assets relative to liabilities.

A company-specific regulatory guide governing directors' duty to prevent insolvent trading — updated December 2024. There's no equivalent regulatory guide for a sole trader or partnership, since there's no director's duty for one to define. Included here briefly because the term is commonly encountered; full detail is in Chapter 2A.

A sole trader or partnership has no statutory safe harbour to claim, since there's no separate entity for one to protect. But building the identical record — informed, proactive monitoring and professional engagement, documented as it happens — is still the soundest protection available. (For an incorporated company, this is codified: provisions inserted into the Corporations Act in 2017 protect directors from personal liability for insolvent trading if they can demonstrate they were taking a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation.)

A sole trader or partnership has no shield to reach through in the first place: debts incurred while insolvent were always the owner's own personal debt. (Section 588G is the company-law provision this compares against: it imposes on company directors a duty to prevent insolvent trading, with personal liability attaching to the individual director where a company incurs a debt while insolvent, or becomes insolvent as a result, and there were reasonable grounds for suspecting it at the time. Included here for context, since the term is commonly encountered.)

The difference between a business's current revenue and its Sustainable Cashflow target — the revenue required to meet every cash obligation including operating costs, debt repayments, drawings, ATO obligations, and reserve provisions. A negative breakeven gap means the business is drawing down reserves every trading period. A positive gap is the safety margin available before the business reaches cashflow crisis.

The pattern by which a profitable, growing business becomes insolvent — not through trading failure but through the cashflow consequences of growth itself. Revenue increases. Working capital is consumed by growing debtors and inventory. Creditors are stretched to fund the gap. The profit and loss statement shows growth while the cash position deteriorates. The growth trap is the most common mechanism of business insolvency in Australia and the primary scenario the BusinessSolvency platform is designed to identify and prevent.

A trading position in which the business generates sufficient revenue each period to meet every cash obligation — operating costs, debt repayments, drawings, tax obligations, and reserve provisions — without drawing down its cash reserves. A business at sustainable cashflow breakeven maintains its cash balance from one period to the next. The Sustainable Cashflow framework was developed by Stephen Fairbairn through independent research from 2019 to 2025 and is the foundational concept of BusinessSolvency.

The equation developed by Stephen Fairbairn through independent research between 2019 and 2025: Revenue IN must equal or exceed cashflow OUT — including all business operating expenses, capital loan repayments, private loan repayments and net private costs, and the reserve needed for operations. The formula is the analytical engine of BusinessSolvency's breakeven gap calculation.

A forward-looking cashflow projection covering the next 13 weeks — one full quarter — updated every week by replacing the most recent completed week with actual results and adding a new forecast week at the end. The 13-week rolling forecast is the standard short-term solvency assessment tool used by insolvency practitioners.

Current Liability fields tracking three ATO-related obligations. A sole trader or partner is personally liable for all three directly, with no notice needed; for a company director, PAYG Withholding and Superannuation Guarantee are two of the three categories a Director Penalty Notice attaches personal liability to — GST is the third, tracked separately as its own GST Payable field. Tax Provision tracks Income Tax owed but not yet paid — a genuine solvency risk in its own right, though Income Tax itself is not a DPN category. PAYG Withholding Payable, Superannuation Payable, and Tax Provision will all match automatically if a business's own chart of accounts happens to use one of those exact names, though only PAYG and Super are standard default account names in Xero and MYOB — Tax Provision is rarely a default account in either system, so it's usually a manual entry in practice even though the field itself is genuinely importable. See Chapter 6, Section 6.8 for the complete field list.

Cash a business has set aside for a known future need but hasn't yet spent — the Loan Repayment Reserve, Drawings Reserve, and Cashflow Reserve fields. Shown as Current Assets, separate from the loan liability itself (already tracked under Short-term/Long-term Debt) and separate from drawings already taken (tracked on the Cash Flow Statement). The purpose is to make clear how much of a business's cash is genuinely free to spend versus already spoken for — every business owner benefits from maintaining this visibility closely, and it directly supports the same cash reserve discipline the AICD expects company directors to maintain for solvency purposes. Why reserves matter, and why they can’t be borrowed when needed: Building Reserves.

A data entry field that automatically repeats last year's figure unless a business owner types a new one over it. Applies to Property, Equity Capital, Right-of-Use Assets, Debtor Days, Creditor Days, and the six Provision/Reserve fields. Leaving the box unchanged carries the prior year's figure forward; typing any non-zero figure overrides it for that year and becomes the new baseline the following year defaults to. Reduces repetitive re-entry for figures that genuinely don't change every period, while still allowing a business owner to update them the moment they do.