The most dangerous misconception in business finance is the belief that a profitable business is a solvent business. It is not — and the gap between the two has destroyed thousands of Australian businesses and exposed thousands of sole traders and partners to personal financial loss.
Profit is an accounting concept. It measures revenue against expenses in a given period, following rules designed for tax compliance and shareholder reporting. It does not measure whether the business has enough cash to pay every obligation it owes — to suppliers, employees, the ATO, lenders, and creditors — as those obligations fall due.
Solvency is a cashflow concept. A business is solvent when it can meet its debts as and when they become due and payable. A business is insolvent when it cannot — regardless of what its profit and loss statement says.
The distinction that matters for every business owner
A profitable business can be insolvent. This happens when the cash generated by trading is consumed by debt repayments, creditor obligations, tax liabilities, and drawings that do not appear on the profit and loss statement. The P&L shows profit. The bank account shows nothing.
An unprofitable business can be solvent. A business running at an accounting loss can remain solvent for extended periods if it has sufficient cash reserves or access to working capital facilities. Solvency is about cash availability, not accounting results.
BusinessSolvency monitors solvency — not profitability. It gives every business owner the view of the business that matters most, whatever the legal structure.
Every set of business accounts contains three financial statements. Each tells a different story about the business. Together they tell the complete story. Separately — as owners too often receive them — they are dangerously incomplete.
The Cash Flow Statement is the third statement — and in most reporting cultures, the least emphasised. Yet it's the statement every sole trader or partner needs most, even with no regulator saying so — and, for an incorporated company, ASIC now explicitly identifies it as the primary tool for a director's solvency monitoring too (see Chapter 2, Section 2.1 for why that line is incorporation, not business size). BusinessSolvency generates it automatically from the P&L and Balance Sheet data — correcting the gap that exists in most professionally prepared accounts.
Practise it
This is part of BusinessSolvency training. Try it on a training copy first, where mistakes cost nothing. Training: reading the three statements together →
At the heart of the Sustainable Cashflow Framework is a simple but structurally important equation — the Sustainable Cashflow Formula, a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period. It asks a different and more important question than any standard profit plan.
Cash OUT — including all business operating expenses
+ capital loan repayments
+ private loan repayments and net private costs
+ reserve required for operational protection
The critical difference between this formula and a standard profit plan is the inclusion of four categories of cash obligation that accounting profit ignores:
- Cost of goods sold
- Wages and salaries
- Rent and occupancy
- Operating overheads
- Depreciation (non-cash)
- Interest expense
- Income tax provision
- Everything in the profit plan
- Capital loan repayments
- Equipment finance repayments
- Private drawings and distributions
- ATO payment plan commitments
- Superannuation catch-up obligations
- Reserve for operational protection
Each item in the right column is a real cash obligation that the business must meet — but none of them appears on the profit and loss statement. A business owner who monitors only the P&L is blind to a substantial portion of the business's actual cash demands, whether that owner sits on a board or works alone.
Practise it
This is part of BusinessSolvency training. Try it on a training copy first, where mistakes cost nothing. Training: the Sustainable Cashflow Formula →
One of the most consistently observed patterns in Australian business closure is what the Sustainable Cashflow research calls the growth trap. It is the mechanism by which a profitable, growing business becomes insolvent — often without any single dramatic event to explain it.
The Ridgeline Landscaping demonstration case in Chapter 8 of this manual shows the growth trap in action across six financial years — a sole-trader landscaping business that makes a profit every year while its bank account sits in overdraft for four of them, driven by Owner Drawings persistently outrunning that year's actual profit and by the second-year tax double hit (a full year's tax and a year of PAYG instalments paid in the same twelve months). The danger is invisible on the P&L, and DSCR, after catching the worst year, goes back to reading "Well Covered" while the bank account is still overdrawn. It is the clearest demonstration of why BusinessSolvency exists — and why "success outpaced cash" can happen to a business of any size.
The Sustainable Cashflow Framework recognises that every business operates within a debt and credit cycle — a rhythm of cash inflows from customers and cash outflows to suppliers, lenders, and the ATO that determines whether the business can survive each trading period.
Understanding this cycle is the foundation of cashflow management. When the cycle is in balance — when cash comes in at least as fast as it goes out — the business is sustainable. When it falls out of balance — when cash goes out faster than it comes in — the business begins to erode its reserves.
The four pressure points in the debt and credit cycle
Debtor days — how long customers take to pay. Every day a customer delays payment is a day the business must fund that debt from its own reserves or working capital facility. As revenue grows, the absolute amount of cash tied up in debtors grows with it.
Creditor days — how long the business takes to pay suppliers. Stretching creditor payments is a common response to cashflow pressure — but it has limits. Suppliers who are paid late reduce credit terms, demand upfront payment, or stop supplying entirely. The ATO does not negotiate indefinitely once enforcement action has started.
Inventory days — how long stock sits before it is sold. Inventory is cash that has been spent but not yet recovered. Excess inventory — common in growing businesses — is a silent drain on working capital that does not appear as an expense on the P&L.
The ATO accumulation — the silent creditor. PAYG withholding, superannuation guarantee charges, and GST obligations accumulate each month. A sole trader or partner who defers these payments is already the taxpayer the ATO will pursue directly, with no notice mechanism needed to reach them. (An incorporated company that defers the same payments is instead building a liability the ATO can convert to a Director Penalty Notice with 21 days' notice, creating personal liability for its director.)
The Sustainable Cashflow Framework introduces a concept that does not exist in standard accounting practice — the cashflow breakeven point. It is distinct from the accounting profit breakeven point, and the gap between the two is the danger zone where profitable businesses become insolvent.
The two breakeven points — illustrated
The cashflow breakeven point is almost always higher than the accounting profit breakeven point — because it includes all the cash obligations that accounting profit ignores. The Sustainable Cashflow Formula calculates this point precisely for each business, in each trading period, using the actual figures from the three financial statements.
When BusinessSolvency shows a Breakeven Gap — the difference between current revenue and the sustainable cashflow target — it is showing the business owner exactly how far the business is from the danger zone, or how far it has already entered it. This is the number that no standard report currently produces. It is the number that every business owner needs, whatever the legal structure.
The chapters that follow explain how to enter your business's data, read the solvency dashboard, and use the Breakeven Gap figure to monitor and manage solvency on an ongoing basis. Chapter 8 shows the complete framework in action using the Ridgeline Landscaping demonstration case.
A recurring failure mode runs through every worked example in this manual: a business, or the accountant reading its figures, treats one healthy indicator as proof the whole picture is sound. DSCR clears its target and the reading stops there. It shouldn't. Ridgeline's own FY2028 shows exactly this: DSCR a comfortable 9.26x ("Well Covered") and Net Income up 61%, in the very same year the business genuinely fails the Sustainable Cashflow Breakeven test by $16,022 — a real, if temporary, cash-sustainability problem that DSCR alone would have completely missed. BusinessSolvency's own Bayside and Coastal Freight cases show the same pattern at the medium and larger-business scale — DSCR comfortably clear while Sustainable Cashflow still reads a shortfall. This section names the standard this manual actually applies, so it is a documented rule an owner or their accountant can point to — not something re-derived by feel each time a report looks encouraging.
The rule: all four, not any one
A business only earns a genuinely clean signal when all four of the following are comfortably clear together — not when any single one of them is:
- DSCR — can trading cash flow service debt, this year, on its own.
- Current Ratio — if short-term claims came due at once, would current assets actually cover them. A business can pass DSCR and fail this, or the reverse.
- Total Equity, sign and trend — the accumulated balance sheet position. DSCR and Current Ratio can both look healthy in a single year while equity itself sits negative underneath, built up over several years neither ratio ever looks back far enough to see.
- Sustainable Cashflow Surplus — the Breakeven Gap from Section 3.6, checked as a percentage of revenue, not just its sign. A thin positive margin — 1% or less of revenue — deserves the same caution as an outright negative one; it takes very little to tip it back under.
Gross Margin trend is worth watching alongside these four as an early-warning signal, even though it isn't itself one of the four pass/fail tests — it is often the first number to move, sometimes a full year before DSCR or Net Income show anything wrong. Where a Contingency Reserve is in place (Chapter 8), its funded percentage of target is a fifth, forward-looking check: a business can pass all four tests above and still be one bad month from trouble if the reserve behind it is thin or unfunded.
What this is actually for
The point of checking all four together is not to make the platform's output more complicated — it is to give an owner or their accountant a documented basis to push back on a number that looks fine in isolation. "DSCR is healthy" is not the same statement as "this business is solvent," and an accountant or their advisor who only ever checks the first one has no real grounds to challenge a comfortable-looking year that a deeper check would flag. This is precisely the discipline missing from every crisis this manual uses to teach the Sustainable Cashflow Framework — caught late, in one form or another, because a single green indicator was allowed to stand in for the whole picture.
It would be simpler to build a single worked example and teach one lesson well. This manual deliberately doesn't do that — Chapter 8 (Ridgeline Landscaping), Chapter 8B (Bayside Home & Living), Chapter 8C (Noosa Care at Home Services), Chapter 8D (Riverbend Sports & Recreation Association), Chapter 8E (Coastline Leagues & Community Club) and Chapter 10 (Coastal Freight) were each built, tested, and verified to expose a genuinely different way conventional financial reporting can miss real solvency risk. None is a harder or easier version of the others. They're different failure modes entirely, and an owner or their accountant who only ever learns to spot one of them is only partly protected.
All six are tested the same way — against the Sustainable Cashflow Formula and the standard suite of DSCR, Current Ratio, and Total Equity signals from Section 3.7. What differs is which signal is the misleading one, and why:
| Business | The signal that looks fine | The signal that tells the truth | What an owner or their accountant has to do differently |
|---|---|---|---|
| Coastal | DSCR back to 1.03x, covered but thin, in FY2028, the year it makes a loss | Sustainable Cashflow Formula (−$1,781,644, failing even after $1.78 million of new borrowing and equity) | Never treat DSCR as a stand-alone verdict — check the Breakeven page directly, every year, not just when DSCR looks amber, and especially not just because fresh capital has recently arrived. |
| Ridgeline | Net Income, positive every year — and in FY2027 DSCR (12.31x), lifted by a one-off tax refund | The Breakeven test, the bank balance and Current Ratio — failing, overdrawn and below 1 from FY2026 to FY2028 | Set drawings against this year’s profit, not last year’s, and plan the tax cash a year ahead — vary the PAYG instalments when profit falls. |
| Bayside | Each individual crisis, once diagnosed and addressed | The next, entirely unrelated crisis arriving anyway | Treat solving one problem as solving one problem — not as evidence the business is now generally safe from whatever comes next. |
| Noosa Care | Net Income and DSCR, reassuring in every forecast year | The bank balance, Breakeven and Cash IN versus Cash OUT — all turning in FY2027, the hiring year | When the business first employs staff, reset drawings to what the business now earns in that same year (and vary the tax instalments if profit has fallen) — not when the overdraft finally appears. |
| Riverbend | The bank balance, positive in every year | Loan cover (−1.61) and the Sustainable Cashflow target ($34,338 short) in FY2027, the first full year of running the new clubhouse | Budget for the running costs, insurance and loan repayments of a new facility before building it, and act on the forecast while the fix is still small. |
| Coastline | The bank balance, higher in FY2027 than the year before — and the Sustainable Cashflow target, met by $134,390 only because of the new loan | Threatened borrowing ($300,000 of the new loan paid for no equipment or reserve), loan cover of 0.10 and a Current Ratio of 0.63 | Treat borrowing to cover running costs as a warning, not a fix — read the forecast, and take advice the moment it shows an overdraft. |
The common thread underneath all six
In every case, a standard profit-and-loss-only view, or a single ratio checked in isolation, would have given an owner or their accountant genuine false comfort — not because the numbers were wrong, but because no single number was ever built to catch every kind of solvency risk on its own. This is the entire premise the Sustainable Cashflow Formula exists to address.
Ridgeline carries the main teaching load in this manual — it's the worked example in Chapter 7 for building a 3-year forecast, and it gets its own full narrative chapter (8) since its lesson needs a continuous story to land. Bayside (Chapter 8B), Noosa Care (Chapter 8C) and Coastal Freight (Chapter 10) each have their own chapter too, written for owners — showing that the same underlying risks apply whatever the business’s size or structure. Riverbend (Chapter 8D) and Coastline (Chapter 8E) show the same risks in clubs and associations, where volunteer committees and boards carry the duty.
Section 3.7 covered the standard the platform actually applies. This section is about what to do with it in practice — which signal to check first, what each lever available to a business owner actually costs, and the traps worth knowing before pulling one.
Four figures matter most, and they do not always move together. Checking only one can leave you dangerously reassured.
| Signal | What it tells you |
|---|---|
| Above / Below BE | Whether trading revenue actually covers every cash obligation this period — wages, overheads, debt, tax, dividends. This is the most direct solvency signal the app produces. |
| DSCR | Whether operating cash flow covers debt service specifically, in every year. Below 1.0 is critical (red); 1.0 to 1.25 is thin (amber); 1.25 is the working target; 2.0+ is well covered. This measures debt serviceability — not overall solvency (every year, below). |
| Current Ratio | Whether short-term assets cover short-term liabilities — the liquidity cushion for the next 12 months specifically. |
| Cash Trend | The direction of travel over the full forecast period — useful for the story, but the least sensitive of the four. Cash can still be rising while the business is trading below breakeven, if new borrowing is propping it up. |
DSCR is checked every year, not just the weakest
A lender looks at every year of a forecast, so BusinessSolvency does too. The DSCR card in the Annual Solvency Report and the Solvency Forecast shows the weakest year first, then every year on its own line: red ✗ below 1.0, where trading cash did not cover the loan repayments; amber, “thin”, from 1.0 to 1.25; a tick above that; or “no loan repayments”.
Below 1.0 in any year holds the score at Caution. If trading cash does not cover the loan repayments in any forecast year (or in the report’s own year), the Solvency Score can be no higher than 67, Caution — Monitor Closely, and a note under the score names the year. The one test can still say “Yes”, because the gap may have been filled from somewhere else. When it was, the “Yes” carries its condition in a pink line, and a pink card above the badge says where the money came from: members’ levies or the owners’ own money, new debt, an overdraft, or cash already in the bank.
A story: Riverbend Sports & Recreation Association (Chapter 8D). The committee’s plan meets the Sustainable Cashflow test in every forecast year and earns the 3-Year Sustainable Cashflow badge. But in FY2028, after $24,358 is set aside into the reserve, trading cash alone does not cover the $7,000 of loan repayments (DSCR 0.15x); the year relies on $30,000 of members’ levies. The Solvency Forecast says “Yes, in every forecast year”, adds “But in FY2028 this relies on $30,000 of members’ levies, grants or appeals”, and holds the score at 67. A committee that knows this can agree the levy with its members early, rather than hear about it from the lender.
Debt Svc in the Year-by-Year Summary (loan repayments) shows in red only in a year when trading cash did not cover them (DSCR below 1.0). In every other year it is in ordinary dark text, and the key under the table says so.
Every lever that improves one figure costs something elsewhere. None of them is free.
| Lever | What it buys you | What it costs |
|---|---|---|
| Creditor Days | Fast, informal cash relief — no paperwork, no approval process | A ceiling exists. Suppliers eventually demand cash terms or cut credit. Invisible to anyone not specifically watching this figure — can mask a real problem for a while |
| Debtor Days | Genuine cash improvement if collections tighten | Customer relationship risk if pursued too aggressively; may not be achievable if terms are market-standard |
| New Borrowings | Transparent, doesn't damage trading relationships, buys real time | Shows up in DSCR immediately, carries an interest cost, and converts a trading problem into a longer-term Balance Sheet commitment |
| Overhead Contingency % | Forces genuine prudence into the forecast — a real buffer, not a hope | Raises the very Breakeven Revenue target you have to clear. A bigger buffer is safer but harder to hit |
| Margin management (COGS%, Fuel, pricing) | The deepest lever available — directly moves the ratio the entire Breakeven Formula divides by | Often outside short-term control (contracts, competition); small % swings in margin move Breakeven Revenue disproportionately |
| Capex timing | Immediate cash flow relief by deferring investment | Deferred maintenance risk; does nothing to fix an underlying margin or trading problem |
| Contingency Reserve (Months of Cover) | A funded buffer the business can point to as an ongoing, proactive governance practice — distinct from reacting to a crisis after it's visible | Ties up capital that could otherwise fund growth or debt paydown; the business must set a genuine equity/trading split rather than treating it as free |
Why reserves matter
A cash reserve is one of the strongest levers in this list, and the slowest to pull. It has to be saved in good times, because in hard times the bank overdraft and suppliers’ credit shrink just when they are needed.
- Identify the actual cause first. Revenue shortfall, margin compression, or a fixed-cost increase are three different problems with three different fixes — don't reach for a lever before knowing which one you're pulling it for.
- Check DSCR and Current Ratio separately. Don't assume one tells you about the other.
- Match the lever to the cause. A margin problem needs a pricing or cost fix, not just a loan. A working-capital squeeze should look at Days before it looks at debt. A genuine investment need should look at Capex timing before either.
- Model any debt-funded fix in full — the new borrowing, its interest, and its repayment schedule — not just this year's cash relief.
- Re-run the forecast and confirm Surplus turns positive again. A recovering Net Income is not the same as a recovered Breakeven position — check the actual signal, not just the direction of one number.
- Once recovered, consider a Contingency Reserve target. Fixing the current problem doesn't protect against the next one — an ownership team that sets a Months of Cover target and a genuine equity/trading funding split is acting proactively, not just correcting damage already done.
Every bill your business pays this year is paid out of its working capital. When the cash runs short, this is where it shows first: long before a loss appears in the Income Statement or the equity turns negative. This section explains what working capital is, the job it does, and why everything BusinessSolvency measures is there to keep it healthy.
What working capital is
Working capital = current assets − current liabilities.
Current assets are what your business has, or will turn into cash within twelve months: cash in the bank, what customers owe you (Trade Debtors), stock, and GST refunds due.
Current liabilities are what your business must pay within twelve months: what you owe suppliers (Trade Creditors), the bank overdraft, GST and income tax owing to the ATO, PAYG and super withheld for staff, short-term loans, and the part of longer loans due this year.
The Current Ratio compares the two: current assets ÷ current liabilities. At 1.5 or more your business has a comfortable cover (green); between 1.0 and 1.5 it is thin (amber); below 1.0 your short-term debts are larger than your short-term assets (pink). BusinessSolvency shows the Working Capital line under the Balance Sheet on the Data Entry page, and the Current Ratio on the dashboard and in the reports.
The job it does. Working capital is the money that keeps trading going in the gap between paying for something and being paid for it. Stock has to be bought before it is sold, and wages paid before customers pay. The cash conversion cycle (11.9) measures how many days that gap lasts, which is how long your business funds its own trading. The reserve is the part kept aside for the unforeseen. The overdraft and suppliers’ credit give a little extra headroom, but only for a short time, and they shrink in hard times.
Why solvency trouble shows here first. Australian law asks one question: can your business pay all its debts as and when they become due and payable? (Corporations Act s95A for companies; the Bankruptcy Act uses the same test for individuals and partners.) That is a working capital question. The first warnings are current assets and current liabilities moving the wrong way:
- suppliers waiting longer to be paid, and Trade Creditors climbing;
- the overdraft creeping towards its limit;
- GST, PAYG and super owing to the ATO building up instead of being paid when due;
- customers paying later, and stock piling up on the shelf.
Each of these can happen while the Income Statement still shows a profit.
Read the trends first
A single year’s figures rarely tell you much. The trend does. Put your actual years side by side: are Stock Days, Customer Days and Supplier Days getting longer, staying steady or getting shorter (11.9)? Is working capital rising or falling? Is the gross margin % holding? A movement that grows year after year is the exception to act on. Left uncorrected, it turns into a problem with margins, cashflow and working capital.
Gross margin sits underneath it all. It is what each sale leaves after the cost of the goods or service, and it has to pay the overheads, loan repayments, tax and what the owners take, as well as carry the working capital the cycle ties up. A slowly falling gross margin % means each sale brings in less cash, so your business needs more sales just to stand still. Discounting is the quickest way to lose it: at a 30% gross margin, a 10% price cut needs 50% more sales to earn the same gross profit.
The trends tell you how to forecast. Set the forecast days from your history. If the forecast is suddenly much better than the history, your business needs a plan to make that happen, or the forecast is only a hope.
The working capital your business needs. Add up what the cycle ties up (stock, plus what customers owe, less what your business owes suppliers) and add the cash reserve target set on the Forecast page. Together they are the sustainable working capital your business needs to pay its bills on time and still get through a slow patch. Compare it, year by year, with the working capital your business actually has. If that falls year after year, or drops below what your business needs, that is the early warning.
The stages and changes that strain working capital
| Stage or change | What happens | What your business needs |
|---|---|---|
| Starting up | Stock, wages and set-up are paid before the first sales come in. | Working capital arranged before you start. |
| Fast growth | Sales rise, but more cash is tied up in what customers owe and in stock. | More working capital, and a close watch on the cash each sale brings in. |
| Slow growth or decline | Sales and gross margin fall while the bills stay the same. | More working capital, and a plan to win back sales. |
| Discounting | Sales rise, but the margin on each sale shrinks. | A higher gross margin, not more volume. |
| Expansion or a big project | Money goes into buildings or equipment, and sales may not grow to match. | More working capital, and the sums done before the money is committed. |
A story: Ridgeline Landscaping (Chapter 8)
| Year | Current assets | Current liabilities | Working capital | Current Ratio |
|---|---|---|---|---|
| FY2025 | $43,863 | $29,907 | $13,956 | 1.47 |
| FY2026 | $47,622 | $49,813 | −$2,191 | 0.96 |
| FY2027 | $29,150 | $36,664 | −$7,514 | 0.80 |
| FY2030 (forecast) | $54,022 | $23,168 | $30,854 | 2.33 |
Ridgeline made a profit every year. But in FY2026 the ATO took two years’ tax at once, the owner kept drawing more than the business earned, and the bank went into overdraft ($34,807 at the end of the year). Working capital turned negative: the first clear sign, while the profit still looked fine. In the forecast, drawings are brought back in line and the overdraft is cleared, and by FY2030 working capital is back to $30,854.
Two more stories: Noosa Care and Coastline
Noosa Care at Home Services (Chapter 8C) grew fast, from $168,000 of revenue to $480,000 in two years. Its customers took 23 days to pay in FY2025 and 37 days in FY2027, and what they owed rose from $10,500 to $48,000. Working capital fell from $120,456 to $69,641 in FY2027. If nothing changes, by FY2028 it is $43,459 below what Noosa needs, and below zero in FY2029.
Coastline Leagues & Community Club (Chapter 8E) paid its suppliers later every year, against agreed terms of 15 days: 31 days, then 33, then 49 days in FY2027, 34 days past its terms, when it owed them $690,000. Its bank rose to $458,790 in the year it lost $717,000, held up by a $400,000 short-term loan and the suppliers’ money. Working capital fell from $65,870 to −$461,130 (11.9). A club is especially exposed: members’ joining fees and subscriptions are voluntary, and members can walk away when times are hard.
Prevention — keeping enough cash, or credit, to pay every bill
The Sustainable Cashflow Formula (3.3). When all cash coming in covers all cash going out each year, working capital is not drained year by year.
Short days (11.9). Written payment terms, invoices on time, follow-up on set days, and stock bought to what sells free cash from the cycle.
Pay your suppliers on time. Your business is one of their important customers. Stretching them is borrowing, and it ends when they lose patience.
Protect the gross margin. Watch cost of goods sold as a % of sales, and think hard before discounting.
Price for the cycle. A quote should cover the time your customer takes to pay, and leave a margin that builds working capital.
Reserves. Cash put aside in good times carries your business through a slow quarter without leaning on the overdraft (Building Reserves).
Pay debts before building reserves, and borrow only for something that lasts. Borrowing that only carries a trading gap (threatened borrowing, 12.2) props up working capital for a while and then makes it worse.
A quarterly review. The Quarterly Solvency Report watches debtors, creditors, short-term loans and ATO/GST owing against revenue each quarter (12.9), so a working capital problem is seen while it is still small.
How BusinessSolvency tells you: the READ FIRST box and the year cards
At the top of the Data Entry page and the Forecast page, the READ FIRST box takes you through one year at a time: the year tab you have selected. Each step is one short line, the answer; tap it for the explanation and the figures behind it. The box reads your saved figures, so press Save All Data after a change.
- Working capital — where trouble shows first.
- Why — the cash cycle. The days your business funds its own trading, and the dollars that ties up (11.9).
- Breakeven and the bank. Did (or will) all the cash coming in pay every bill going out? MET or SHORT, by how much, and the bank at the start and the end of the year.
- What to do. One or two actions, word for word from that year’s card in the report, with a link to the card.
- Cash in and still unknown (Forecast page only). Things to settle with your accountant before you rely on the forecast, such as terms not yet entered.
The working capital line in step 1 is the same line as on that year’s card in the Annual Solvency Report and the Solvency Forecast. It reads at one of three levels:
| Level | When |
|---|---|
| ACT NOW (pink) | Working capital below zero, short of what the cash cycle ties up, or short of the cycle plus the reserve target and still falling. Or customers, suppliers or stock more than 10 days past your business’s own terms (below). The card lists “Working capital deficit: act now” first among its urgent actions, and when working capital is short the box names the biggest bill due within the year that is not a supplier (short-term loans, the ATO, the overdraft or GST). |
| KEEP WATCH (yellow) | Working capital lower than the year before; the gross margin down by a point or more; the cash cycle covered and working capital rising while the reserve is still being built; up to 10 days past your terms (overdue); or a year that started overdrawn and cleared it by year end, with no reserve yet. |
| ON TRACK (green) | Nothing to flag. |
Deficits in red. Every deficit figure in the box is in bold red, on screen and in print, so a busy reader can’t miss it. A year that started overdrawn says so: clearing an overdraft is real progress, but with no reserve yet the first slow month goes back onto the overdraft.
Days in your favour. When the cash cycle is below zero, step 2 says “N days in your favour”: your suppliers are carrying part of your trading. If that is only because suppliers are being paid past your agreed terms, it adds, in red, “but only because suppliers are kept waiting” (Coastline, 11.9).
Pink means act now. The box turns pink when the year shown needs action: a working capital deficit, short of Breakeven, the bank overdrawn at year end, or an urgent action. That year’s card in the report turns pink for the same reasons, and when anything needs action every page of the report prints, for your accountant to go through with you (12.10, 12.11).
A story: Ridgeline’s best year still reads ACT NOW. In FY2030 Ridgeline Landscaping’s working capital is back to $30,854, up from below zero, and the year started $9,673 overdrawn and cleared it. That is good news, and the card says so. But suppliers are paid in 27 days against terms of 15, 12 days past, so the card asks the business to pay to its terms before suppliers lose patience.
Your business’s own terms — the yardstick for the days
Days only mean something against the terms your business has agreed. Your accountant sets them with you under Edit Details (an owner can too):
- Paid by card (% of sales) and Card settlement (days): how much of your sales is paid by card, and how many days your card provider takes to put the money in your bank.
- Account customers’ terms (days): how long customers on account have to pay.
- Supplier terms (days): how long your business has to pay its suppliers.
- Stock target (days): how many days of stock your business aims to hold.
The card rule. Your customer terms are blended by the share paid by card: card share × card settlement days, plus the rest × account terms. Bayside Home & Living takes 70% of its sales by card, settled in 2 days, and gives account customers 15 days: 70% × 2 + 30% × 15 = 1.4 + 4.5, about 6 days. A business paid entirely by card has its card provider’s settlement days as its customer terms.
The 10-day rule. Within terms is on track. Up to 10 days past terms shows as overdue (yellow, keep watch). More than 10 days past asks for action now (pink), with its own action: Suppliers kept waiting: prepare to pay now; Customers paying late: collect now; Card takings slow to reach your bank: check now; or Stock held too long: sell it down.
Set a stock target too. Every business carries some stock: goods for sale, food and drink behind a bar, materials, spare parts. Enter the stock target with the other terms. A term left empty shows on the Forecast page’s READ FIRST step 5 as still unknown, to settle with your accountant.
Card surcharges are banned from 1 October 2026. Build card fees into your prices, and compare card providers’ settlement times as well as their fees: the settlement days are your customer terms. The government’s decision, and what it means for your business, is set out below.
Agree terms in writing, and enforce them: a person or system that follows up slow payers every week is well worth the cost. If a customer insists on long terms, build the cost of waiting into your price. If a supplier offers a discount for paying early, taking it is often worth more than keeping the cash, and it protects your gross margin.
Card surcharges end on 1 October 2026 — a government decision that changes your prices
On 31 March 2026 the Reserve Bank of Australia (RBA) published the conclusions of its review of merchant card payment costs and surcharging. It found that surcharging was no longer working as intended. From 1 October 2026:
- No card surcharges on eftpos, Mastercard and Visa debit, prepaid and credit cards, whether the card is tapped or inserted, used on a phone, or used online. American Express, UnionPay and PayPal have also chosen to stop surcharging from the same date.
- Lower interchange fees. The RBA lowered the caps on interchange, the part of your business’s fee on each card payment that goes to the bank that issued the card. For personal credit cards the cap fell from 0.8% to 0.3%. A cap on foreign-issued cards follows from 1 April 2027. The RBA estimates the changes lower businesses’ card costs by around $910 million a year, and that small businesses benefit most, because they pay fees closer to the caps.
- More open fees. eftpos, Mastercard, Visa and large acquirers will have to publish the fees they charge, and businesses will get fee information in a standard form on their statements, so quotes can be compared. Some of these changes start on 1 April 2027.
- Not affected: weekend and public holiday surcharges, booking fees and service fees.
What it means for your business. Card fees are still a cost, but they can no longer be added at the till. They now come out of your gross margin unless they are built into your prices. For example, if your business surcharged before, a 1.5% card fee on $500,000 of card sales is $7,500 a year that now has to be covered some other way. The RBA estimates 16% of merchants surcharged.
- Work out what card payments cost your business now: the fees on your merchant statement, as a % of card sales.
- Review your prices so the margin still pays every bill, and check the Breakeven page after you change them (3.3).
- Talk to your payment provider, and compare providers: the fee, and how many days they take to settle. The settlement days are your customer terms (above).
- Turn off any system that adds a card surcharge automatically, and update price lists, menus and signs.
Sources: RBA media release 2026-10, 31 March 2026 · RBA Conclusions Paper in brief · RBA Conclusions Paper, executive summary · business.gov.au: card payment surcharge changes · CommBank newsroom, 28 September 2026
Planning the forecast days: our rule
A forecast is only as honest as the days in it. If your business plans to collect from customers faster than it ever has, or to keep suppliers waiting longer than it ever has, the bank balance in the forecast looks better than it will be. So BusinessSolvency plans the days the way an established business should: responsibly, not adventurously.
- Start from what your business actually achieved last year: its real customer days and supplier days.
- Never plan worse than last year.
- Improve by no more than 5 days a year, and stop when you reach your terms.
- Pay suppliers sooner only in a year that meets Breakeven and is not overdrawn. A year that is short of cash cannot afford to.
Stock follows sales. Stock should be in proportion to what your sales need. Overstocking is wasteful: old stock has to be sold off at cut prices, and clearing it gets in the way of new sales. So stock days step towards your stock target in the same way, by no more than 5 days a year. If your business has a stock system, use its figures (tick Manual beside Inventory / Stock on the Forecast page).
Step towards our terms. On the Forecast page, the Working Capital Terms row shows your last real year’s days next to your terms. The Step towards our terms button fills in the customer, supplier and stock days for each forecast year by rules 1 to 3. Check them with your accountant, then press Save All Data. Then apply rule 4: open the Solvency Forecast, and in any year that misses Breakeven or ends overdrawn, set that year’s Creditor Days back to the year before. If your terms are not set yet, the row asks you to set them in Edit Details first.
The worked examples follow this rule. Coastal Freight paid its suppliers in 28 days in FY2027, so the plan holds 28 days while the years miss Breakeven, and FY2028 is $1,781,646 short (Chapter 10). Bayside paid in 52 days, so the plan steps to 47 and 42 rather than catching up all at once (Chapter 8B). Ridgeline’s customers are asked to pay 5 days faster each year (Chapter 8).
Within 10 days of your terms: keep watch. When customers, suppliers or stock run past your terms by up to 10 days, the report card gives a yellow keep watch card for that year (one card, even when two or three items are a little past). More than 10 days past is pink: act now (your terms, the READ FIRST box).
Glossary: Working Capital · Cash Conversion Cycle · Payment Terms · Supplier Days. Practise it on a training copy: Training →
Chapter 11 — Purchases, Payments & the Working Capital Engine — goes one level deeper into the Creditor Days and Debtor Days levers introduced above, covering exactly how they drive Trade Creditors and Trade Debtors under the surface.
Key sources drawn on in this chapter
- Stephen Fairbairn — Sustainable Cashflow Manual, January 2025 (primary source throughout)
- Stephen Fairbairn — Sustainable Cashflow research and framework development, 2019–2024
- Stephen Fairbairn — NED Solvency and Governance Research Series 2026
- ASIC Regulatory Guide 217 — Duty to Prevent Insolvent Trading, updated December 2024
- Corporations Act 2001 (Cth) — Section 95A, definition of solvency
- Clayton Christensen — Competing Against Luck (2016) — jobs-to-be-done framework applied to financial tools
- Professor Roger L. Martin — HBR articles on planning vs strategy (2022)
- ABS Business Entry and Exit Statistics — cashflow as primary cause of business closure
- CBInsights — Top 12 Reasons Startups Fail (2021) — running out of cash, ranked second