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 company 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 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 BoardSolvency.

The residual interest in the assets of a business after deducting all liabilities. Equity represents what belongs to the owners — the shareholders or directors — 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.

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.

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 can meet its short-term obligations. Negative working capital is a primary indicator of insolvency risk.

A formal notice issued by the Australian Taxation Office that makes a director personally liable for unpaid PAYG withholding, superannuation guarantee charges, or GST. The ATO can issue a DPN with 21 days notice — without a court order. Once issued, the director has 21 days to cause the company to pay the debt, appoint a voluntary administrator, or appoint a liquidator. Failure to act within 21 days makes the director personally liable for the full amount.

The act of a company incurring a debt at a time when it is insolvent — or when the incurring of that debt causes it to become insolvent. Under Section 588G of the Corporations Act, a director who allows insolvent trading to occur may be personally liable for the debts incurred during the period of insolvency.

Under Section 95A of the Corporations Act, a company 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.

The Australian Securities and Investments Commission's guidance document on the duty to prevent insolvent trading — updated December 2024. RG 217 sets out ASIC's expectations of directors with respect to solvency monitoring, the safe harbour provisions, and the practical steps directors should take to meet their obligations under Section 588G.

Provisions inserted into the Corporations Act in 2017 that 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 for the company than immediate administration or liquidation. The safe harbour requires documented evidence of informed, proactive monitoring and professional engagement.

The provision of the Corporations Act 2001 that imposes on directors a duty to prevent insolvent trading. A director contravenes Section 588G if a company incurs a debt when the company is insolvent or becomes insolvent as a result, and at that time there are reasonable grounds for suspecting insolvency. Personal liability attaches to the individual director — not the company.

The difference between a company'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 BoardSolvency 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 BoardSolvency.

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 BoardSolvency'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 and is the operational forecasting instrument in the BoardSolvency forecast module.