Bayside Home & Living Pty Ltd is a fictitious Australian homewares retailer: a growing company with stores, stock, staff and a loyal customer base. Retail was chosen because everyone understands it. Every reader has bought from a shop, and stock, customers who pay on account, and suppliers who give credit are familiar ideas whatever your own industry.
Because Bayside is a company, the people responsible are its directors. It pays company tax at 25% every year, and the reports speak in company terms: the duty not to trade while insolvent (section 588G of the Corporations Act), Director Penalty Notices for unpaid tax, and the safe harbour for directors who act early. Shareholders put money in as equity and take it out as dividends.
Bayside is not a failing business on paper. It makes a profit in every one of the six years, and revenue grows from $12.0 million to $20.29 million. A director reading only the Income Statement would see no reason for concern at any point. Underneath, three separate cash problems arrive one after another: a store fit-out and a stock build (FY2025 to FY2026), a collapse in how quickly customers pay (FY2027), and a $6 million expansion (FY2028). Each is caused by something different, and each needs its own fix.
What the analysis shows
On the Income Statement, FY2025 looks solid: revenue of $12.0 million at a 37.7% gross margin and a Net Income of $612,750. A management report would describe a profitable, growing company.
The Cash Flow Statement tells a different story. Believing growth justified it, the directors opened a new store: a $1,200,000 fit-out. At the same time stock built up to $2,100,000. Stock that hasn't been sold yet, and equipment, are not expenses on the Income Statement, but they are paid for in cash. Trading cash for the year was negative (−$209,850), and after the fit-out, loan repayments and an $80,000 dividend, cash fell by $1,499,850, from $868,000 to −$631,850.
The Sustainable Cashflow test is blunt about it. To pay for everything this year, the fit-out included, revenue would have needed to be $16,899,122: $4,899,122 more than it was. That is not a sign the store was a bad idea. It is a sign it was paid for out of cash the company didn't have, instead of with long-term finance or shareholder equity sized for it.
What this year called for — from the Annual Solvency Report
Cash is overdrawn by $631,850. Formal insolvency advice should be sought immediately.
Revenue $4,899,122 below the Sustainable Cashflow target. About $408,260 a month.
Trading cash did not cover loan repayments (DSCR −1.47x). Talk to the lender before a repayment is missed.
Tax paid well above this year's own tax ($311,850 paid against $204,250 owed). Ask the accountant about the PAYG instalments.
What the analysis shows
Revenue grows 15% to $13.8 million, the best year yet on paper. But Gross Margin slips from 37.7% to 32.7% as competition bites, and Net Income falls to $186,750. Still a profit, so still no alarm on the Income Statement.
Customers are paying on normal terms (debtors of $1,134,247, about 30 days), so this is not a collections problem yet. The cash is going into stock, which grows again to $2,450,000, and into thinner margins. Trading cash is negative for the second year running (−$33,070), cash deepens to −$814,920, and revenue is $616,849 short of Breakeven. This is the second consecutive year of a cash deficit in the actual accounts, the kind of position section 588G is concerned with.
What this year called for
Cash overdrawn by $814,920: formal insolvency advice. Revenue $616,849 below the Sustainable Cashflow target: about $51,404 a month. DSCR −0.17x: talk to the lender. In practice, this is the moment to bring in an accountant or restructuring adviser, check whether the new store is earning its keep, and stop the stock build, before a third problem arrives.
What the analysis shows
Revenue grows 6.4% to $14,679,091 and Net Income recovers to $388,268. But a new and unrelated problem appears: Trade Debtors nearly double, from $1,134,247 to $2,211,917. That is about 55 days of sales sitting with customers, against about 30 days in every earlier year. Customers are being allowed to stretch their payments with no formal credit terms or follow-up. Real businesses rarely have just one problem at a time.
Cash does improve, from −$814,920 to −$360,061. But look at where the improvement came from: stock was run down by $550,000, a $79,750 tax refund arrived, and the company took on $450,000 of new borrowing. Trading cash ($268,859) still didn't cover loan repayments and interest: DSCR is 0.74x.
The present-year Breakeven Report shows Breakeven met — surplus $988,063. That figure counts all cash in, including the $450,000 borrowed during the year. A director should read it together with the overdraft and the DSCR: the year paid its way only with borrowed money, and the company is still overdrawn.
Actions needed now — from the Annual Solvency Report's Year by Year section
Cash is overdrawn by $360,061. The business is trading in a cash deficit. Formal insolvency advice should be sought immediately.
Trading cash did not cover loan repayments (DSCR 0.74x). Talk to the lender before a repayment is missed.
ATO obligations of $67,173 not covered by cash. This carries Director Penalty Notice risk. Engage the ATO proactively, before the due date.
And the fix the report can't type for you: a written 30-day credit policy and an aged-debtors follow-up every week. The money owed by customers is the quickest cash this company has.
This is the top of Bayside's Annual Solvency Report for FY2025 to FY2027, as the platform produces it today.
Annual Solvency Report — Bayside Home & Living Pty Ltd · FY2025 to FY2027 · Score 41/100, High Stress — Action Required
The Story So Far
Three of the four cards read green, and the score is still 41, High Stress, because the present year's cash is overdrawn. That is deliberate: a company with an overdraft can never be scored as sound, however good the other signals look. The green cards each need a second look. Cash Trend is “Improving” because −$360,061 is better than −$631,850, but it is still an overdraft. Breakeven Gap is positive because the year's cash in includes $450,000 of borrowing. Current Ratio of 1.64x is lifted by the $2.2 million owed by customers, money the company has not collected.
The Year by Year section lists the actions for each year, and because the score is below 68, the report includes the Safe Harbour card for the directors: protection depends on a documented, active step, raised in writing, minuted and backed by independent advice.
What the analysis shows
The forecast's first year brings a third, different pressure: a deliberate $6,000,000 store expansion, funded mostly by $4,000,000 of new borrowing, landing while the company is still overdrawn. Revenue grows to $17,805,737, Net Income to $719,551, and collections improve (debtors fall to $1,707,399). DSCR reads a very comfortable 6.23x, because trading cash is strong and the new loan's repayments haven't started in earnest.
Even counting the new borrowing as cash in, revenue misses Breakeven by $174,817 on $17.8 million, about $14,568 a month. The expansion has used the cash, and cash ends the year still overdrawn at −$353,059. With the bank overdrawn, nothing goes into the Contingency Reserve this year (its target is $422,083), and the shareholders are not asked for reserve money: debts are paid first, as lenders, creditors and accountants would expect. There is no cost headroom: costs would need to fall 1.3% for the year to break even.
The shareholders, used to a dividend in the good years, would like one again. Their accountant advises against it, and the board agrees: the company is overdrawn, its tax is not covered by cash, and the shareholders themselves are being asked to put money in. No dividend is paid. Had the usual $120,000 been paid, the year would have missed Breakeven by about $648,870 and the overdraft deepened to −$473,059 — a plan no lender or new investor would back.
Planning the days the responsible way
In FY2027 Bayside paid its suppliers in 52 days, against the 15 days agreed. An earlier version of this forecast planned 54 days in FY2028, longer than Bayside had ever made them wait, and then a jump to 27 days in FY2029: about $910,000 of supplier bills paid off in a single year.
The forecast now follows our rule for planning the days: start from what your business actually achieved last year, never plan worse, and improve by no more than 5 days a year towards your terms. So suppliers are paid in 52, 47 and then 42 days. Customers keep the collection drive agreed with the accountant (debtors fall to $1,707,399, about 35 days, then $1,058,588, about 20 days).
Planned the responsible way, FY2028 misses Breakeven by $174,817 (the old plan met it by $112,949) and the overdraft deepens to −$353,059. FY2029 becomes easier: cash closes at $552,920 and the shareholders are not asked for reserve money. Suppliers are still paid 27 to 37 days past terms in every year, so “Suppliers kept waiting: prepare to pay now” stays an act-now item.
What the Solvency Forecast shows the directors
FY2028's actions: Cash forecast to be overdrawn by $353,059. The plan does not work as it stands. Change it before this year starts (revenue, costs, dividends or funding), and agree it with the board and your accountant in writing. Then No reserve set aside this year: pay the overdraft down first. And ATO obligations of $110,427 not covered by cash, with Director Penalty Notice risk. The 3-Year Sustainable Cashflow badge reads NOT YET SUSTAINABLE: FY2028: no reserve while the bank is overdrawn. Because cash is overdrawn in FY2028, the forecast's score is held at High Stress, 41/100.
What the analysis shows
The recovery levers work. Capital spending drops back to $500,000 of maintenance, loan repayments rise to $400,000 a year to service the new borrowing, collections tighten further (debtors fall to $1,058,588) and stock falls to $500,000. Net Income reaches $971,517, enough to clear the $353,059 overdraft: cash closes the year at $552,920, out of overdraft for the first time in the story, with the $83,989 of company tax still owing to the ATO at year end kept aside (tax owing is a debt to be paid next year, not spare cash). The reserve is funded in one step to its two-month target of $895,030, all from the company's own cash: paying suppliers 5 days sooner, rather than catching up all at once, leaves the cash to do it. Breakeven is met by $3,293,988, cost headroom is 25.8%, and DSCR is 3.53x.
Shareholders put in $250,000 of new shares this year; no reserve money is needed from them. They ask again about a dividend, and are again advised to wait: money should not go out to shareholders in the same year they are being asked to put it in.
No dividends while things are negative
A company may pay a dividend only if its assets exceed its liabilities, the dividend is fair to shareholders as a whole, and it does not materially prejudice the company's ability to pay its creditors (section 254T of the Corporations Act). Bayside paid dividends in FY2025 ($80,000) and FY2026 ($30,000), both in years that ended overdrawn — part of how the cash problem built up.
The forecast does not repeat that. The shareholders would like their dividend back in FY2028 and FY2029, but in both years the company is either overdrawn or asking them for new money, so they are advised to wait. In practice a lender or new investor would push back hard on a company paying money out with one hand while asking for it with the other, and the next request for funds could fail. Dividends are a question for the board only once the reserve is fully funded and no further shareholder money is needed — and then only after the board has minuted it and the accountant has confirmed the section 254T test.
What the analysis shows
Revenue reaches $20,285,186 and Net Income $1,069,472. Capital spending settles at $400,000, a further $250,000 of shareholder equity comes in, and no dividend is paid. The year's reserve top-up comes entirely from the company's own trading cash, so the shareholders are not asked for any reserve money. Cash closes at $722,675, Breakeven is met by $800,623, Current Ratio is 1.81x and DSCR 1.68x, covered: the weakest DSCR of the three years, because the loan repayments now run at $400,000 a year. Behind it sits a fully funded three-month Contingency Reserve of $1,389,425. Total Equity has grown to $4,780,308, and long-term debt is down to $3,522,000. The expansion is paid for and earning its keep.
Why the forecast still scores 41, not 90
Judged on FY2030 alone, the score would sit in the “Financially Sound” band. But the four cards at the top of the Solvency Forecast name the weakest year: Breakeven Gap −$174,817 in FY2028, and DSCR 1.68x in FY2030, still covered (Chapter 9). But the score looks at every forecast year, and cash is overdrawn in FY2028, so it is held at High Stress, 41/100, and the score band says why. A plan that runs an overdraft through its first year has not yet shown it can carry its own expansion. Change FY2028 so cash stays positive, through more equity or a slower expansion, and the score is free to rise.
Breakeven tells you the revenue needed to pay every bill if costs come in as planned. A growing business rarely gets that luxury. Wages rise, rent is reviewed, suppliers pass on price increases, and more staff are needed to serve more customers. Every one of those rises lifts the revenue needed just to break even, and by more than most owners expect.
The reason is simple arithmetic. A dollar of extra cost is a full dollar out of the bank. A dollar of extra sales is not a full dollar in: Bayside keeps about 33 cents of it after the cost of the goods sold, then pays tax on the profit, and waits for credit customers to pay. In FY2030, one more year of 4% inflation on Bayside's wages and overheads adds $209,132 of cost, and lifts Breakeven Revenue by $550,008. Every $1 of extra cost needs about $2.60 of extra sales just to stand still.
The Forecast Breakeven Report now shows this for every forecast year, under Sustainable Cashflow Growth Disclosure:
- Keeping pace splits the forecast's revenue growth into inflation and real growth. Bayside's FY2030 revenue grows 5.0%, but after 4% inflation that is only 1.0% real growth.
- The cost stress test re-calculates Breakeven Revenue with wages and overheads running above plan, by the year's inflation rate unless you choose another figure, shows how much more revenue that takes, and whether the forecast still covers it. The inflation rate is one figure for the whole platform (4% as at October 2026), which a business can change for any year.
- Cost headroom is the single figure to remember: how far wages and overheads can rise before the year stops paying its way. Compare it with the wage and price rises you actually expect.
| Year | Forecast revenue | Breakeven as planned | Breakeven if costs +4% | Extra revenue needed | Result | Cost headroom |
|---|---|---|---|---|---|---|
| FY2028 | $17,805,737 | $17,980,554 | $18,522,940 | $542,385 | Short by $717,203 | −1.3% |
| FY2029 | $19,319,225 | $16,025,237 | $16,533,608 | $508,371 | Covered by $2,785,617 | 25.8% |
| FY2030 | $20,285,186 | $19,484,563 | $20,034,571 | $550,008 | Covered by $250,615 | 5.8% |
Read the last column first. In FY2028, the expansion year, Bayside is already $174,817 short with costs as planned: there is no headroom at all, and costs would need to fall 1.3% for the year to pay its way. One more year of 4% inflation than planned leaves it $717,203 short. (Had the usual $120,000 dividend been paid as well, the shortfall would be about $648,870.) FY2029 has plenty of room, 25.8%. FY2030’s headroom is 5.8%, about a year and a half of 4% inflation: enough for one more year of cost rises, not a run of them, while the business still pays every bill, funds its reserve and carries the extra debtors and stock that more sales bring.
Why a growing business needs a surplus, not just Breakeven
Growth is a hard challenge for cash. More sales mean more money waiting in debtors and more stock on the shelves before a dollar comes back. More staff and bigger premises arrive before the extra revenue does. The reserve target grows with the costs it is meant to cover. And inflation lifts costs every year whether sales grow or not. A business that only breaks even has no room for any of this; the first cost rise puts it in deficit. A business with a healthy surplus, and the headroom to show for it, can grow without running out of cash on the way. That is the whole purpose of the Sustainable Cashflow Formula: not to break even, but to create a surplus large enough to carry the business through rising costs and into a stronger position.
How to use cost headroom
Look at the headroom for every forecast year, not just the last. Leave the cost stress test on Auto (the year's inflation rate), or set it to what you really expect (wage agreements, rent reviews, supplier notices) and see whether the forecast still covers it. If a year's headroom is smaller than the rises you expect, the plan needs more revenue, better margins or less cost before the year starts, not after the overdraft arrives. For directors, a documented headroom check at each review is exactly the kind of forward-looking step the safe harbour rewards.
Bayside's earlier fixes were reactive: they dealt with damage that had already arrived. A Contingency Reserve is the opposite: cash set aside before the next shock. That matters for directors. The safe harbour in section 588GA protects a director who develops a course of action reasonably likely to lead to a better outcome. A funded reserve, sized against real monthly costs and reviewed at every quarterly review, is a documented, ongoing step a director can point to, stronger than simply having survived a crisis.
Bayside's reserve target rises from 1 month of costs in FY2028 to 3 months by FY2030. Nothing goes into the reserve in FY2028, while the company is overdrawn: debts are paid first. From FY2029 it is funded first from the company's own spare cash. Shareholders are asked only for the part that cash cannot cover, and never for more than the tapering 70% / 50% / 30% share covered in Chapter 3, Section 3.9. Money borrowed during the year never counts as spare cash.
| Year | Reserve target | Reserve reached | Shareholder reserve equity | Dividend |
|---|---|---|---|---|
| FY2028 | $422,083 | $0 (overdrawn: debts first) | Nil (held back) | Nil — advised to wait |
| FY2029 | $895,030 $895,030 Nil (the company’s own cash covers it) | Nil — advised to wait | ||
| FY2030 | $1,389,425 | $1,389,425 | Nil (trading cash covers it) | Nil |
Shareholders put in $250,000 of new shares in both FY2029 and FY2030 to back the recovery; the reserve itself is funded from the company’s own cash. No dividend is paid in any forecast year.
Holding back dividends is part of the same safe-harbour step. A board that keeps paying shareholders while the company is overdrawn and asking them for new money could find it hard to show a course of action reasonably likely to lead to a better outcome. Bayside's shareholders would like their dividend back from FY2028; the board's documented decision is to wait until the reserve is fully funded and no further equity is needed. That decision, minuted at each quarterly review, is as much a part of the safe-harbour record as the reserve itself.
What a thin equity base does to this mechanism — and why that's the point
A reserve only reads as credible against a proportionate equity base. A business whose invested capital was never revisited as it grew can find that building a reserve reveals an equity gap that had been building for years, invisible in an ordinary tax return. The reserve doesn't cause the gap; it reveals it, years before it would show up as a missed payment or a creditor's demand. The directors then have a genuine choice, not a default: raise more capital so the reserve is affordable, or scale the target back until Breakeven holds. Either way, it is a documented decision made early, which is exactly what the safe harbour rewards.
Why reserves matter
Bayside builds its reserve before the next shock, not after it. That order matters: in hard times the bank and suppliers give less credit, and a reserve can’t be borrowed when it is needed.
Bayside shows three things a profit-only view never shows a director.
First, a company can be growing and profitable in every year and still be in a genuine cash crisis. Bayside's Net Income never turns negative, yet its actual accounts show three years of overdraft. The causes were a store fit-out, stock and slow-paying customers, none of which appears as an expense on the Income Statement.
Second, problems arrive from different directions. A director who fixes the stock problem can still be caught by a collections failure, and then by an expansion. Each needs its own fix, and the Year by Year actions name each one in the year it appears.
Third, a surplus is not the same as a buffer, and a positive figure always needs to be read with its source. Bayside's present-year Breakeven surplus counts borrowed money as cash in, and FY2028 misses Breakeven even with $4 million of new borrowing counted as cash in. Only when the cash test, the overdraft, DSCR and the reserve are read together does the full picture appear.
The key figures for all six years, straight from the BusinessSolvency calculation engine. Directors can stop here, or read on.
In short: every key figure for FY2025–FY2030 in one table, with the cash movements and the solvency ratios year by year.
| Figure | FY2025 | FY2026 | FY2027 | FY2028 (F) | FY2029 (F) | FY2030 (F) |
|---|---|---|---|---|---|---|
| Revenue | $12,000,000 | $13,800,000 | $14,679,091 | $17,805,737 | $19,319,225 | $20,285,186 |
| Net profit (Net Income) | $612,750 | $186,750 | $388,268 | $719,551 | $971,517 | $1,069,472 |
| Company income tax | $204,250 | $62,250 | $129,423 | $239,850 | $323,839 | $356,491 |
| Trading cash (operating cash flow) | −$209,850 | −$33,070 | $268,859 | $2,271,002 | $1,555,979 | $719,755 |
| of which set aside into the cash reserve | $0 | $0 | $0 | $0 | −$895,030 | −$494,395 |
| Spent on equipment and buildings | −$1,200,000 | −$90,000 | $0 | −$6,000,000 | −$500,000 | −$400,000 |
| New borrowing | $30,000 | $50,000 | $450,000 | $4,000,000 | $0 | $0 |
| Loan repayments | −$40,000 | −$80,000 | −$264,000 | −$264,000 | −$400,000 | −$400,000 |
| Shareholders’ money in (proceeds from issue of shares) | $0 | $0 | $0 | $0 | $250,000 | $250,000 |
| Sustainability equity injection | $0 | $0 | $0 | $0 | $0 | $0 |
| Dividends | −$80,000 | −$30,000 | $0 | $0 | $0 | $0 |
| Cash at start of year | $868,000 | −$631,850 | −$814,920 | −$360,061 | −$353,059 | $552,920 |
| Cash at year end | −$631,850 | −$814,920 | −$360,061 | −$353,059 | $552,920 | $722,675 |
| Cash reserve held (a separate asset) | $0 | $0 | $0 | $0 | $895,030 | $1,389,425 |
| ATO amounts owing | $0 | $0 | $67,173 | $110,427 | $83,989 | $32,652 |
| Short-term loans | $150,000 | $230,000 | $400,000 | $200,000 | $200,000 | $0 |
| Long-term debt | $280,000 | $170,000 | $186,000 | $4,122,000 | $3,722,000 | $3,522,000 |
| Suppliers owed (trade creditors) | $1,330,000 | $1,529,827 | $1,618,915 | $1,904,594 | $1,858,713 | $1,742,657 |
| Sustainable Cashflow target: revenue above (+) or below (−) it | −$4,899,122 | −$616,849 | +$988,063 | −$174,817 | +$3,293,988 | +$800,623 |
| Loan cover (DSCR): trading cash ÷ loan repayments | −1.47 | −0.17 | 0.74 | 6.23 | 3.53 | 1.68 |
| Current Ratio: short-term assets ÷ short-term debts | 1.48 | 1.42 | 1.64 | 1.15 | 1.37 | 1.81 |
- Cash check: each year’s cash at year end equals cash at the start of the year, plus trading cash, less equipment and buildings, plus or minus the financing lines above; and each year starts with the previous year’s closing cash. It agrees to the dollar in all six years.
- Tax: company income tax at 25%.
- The cash reserve: money set aside into the reserve is taken out of trading cash and held as a separate asset, so “cash at year end” is the cash left free after the reserve. Both are shown. Nothing is set aside while the bank is overdrawn (FY2028).
- The Sustainable Cashflow target counts every cash payment, including equipment, loan repayments and dividends, and counts new borrowing and money put in by the shareholders as cash in (Chapter 3).
- Scores: the BusinessSolvency score is 41 out of 100 for the actual years and 41 for the forecast.
- See it live: during alpha testing, request access to open this business’s forecast in the BusinessSolvency app.