The Fairbairn Formula — BoardSolvency

"Most directors don't see it coming. The Fairbairn Formula means you will."

— The principle behind ten years of independent research

The Question Every Board Must Answer

One question. Every board meeting. No exceptions.

Directors carry personal liability for insolvent trading under Section 588G of the Corporations Act. ASIC's updated Regulatory Guide 217 (December 2024) requires active, continuous, independent monitoring. Yet most directors have no structured framework for answering the question that determines their personal exposure.

The Fairbairn Formula — Central Question

"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. It is a legal one. A director who cannot answer it — with evidence — is not discharging their duty of care under the Corporations Act.

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. The Fairbairn Formula gives directors the structured framework to ensure they always know — and can prove it.

Four Key Principles

The framework that changes everything for directors.

The Fairbairn Formula is built on four interlocking principles — each derived from ASIC's RG 217 requirements and the pattern of Australian business failures analysed over ten years of independent research.

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.

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.

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 board governance obligation, not a management preference.

Forward-looking monitoring must be documented

Historical financial statements tell directors where the business has been. The Formula requires forward-looking solvency forecasts at every board meeting — and a documented record that the assessment was made. Without documentation, there is no defence.

The Eight Components

Eight indicators. One integrated solvency assessment.

The Fairbairn Formula measures solvency across eight structured components — each addressing a distinct dimension of financial sustainability that directors are legally required to monitor.

The Fairbairn Formula — Core Equation

Cash In minus All Obligations minus Unexpected Events Provision = Solvency Adequacy Score

A positive score across all eight components, sustained across every trading period, is the Fairbairn standard for director solvency adequacy. BoardSolvency calculates this automatically.

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.

Director obligation: Verify at every board meeting that cash from operations exceeds cash costs of operations.

Equity Adequacy

EA — Balance Sheet Test

Does the business have positive net equity — assets exceeding liabilities? A declining equity position, without board resolution, is a solvency warning sign requiring immediate action.

Director obligation: Review the balance sheet at every board meeting. A negative equity trend must trigger a board resolution.

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.

Director obligation: All debt repayment schedules must be included in the board's cash flow forecasts — not just interest costs.

Personal Obligation Coverage

POC — Owner/Director Drawings

Are personal drawings, director fees, and owner obligations adequately covered by operating cash flow? Personal obligations compete directly with business obligations for the same cash pool.

Director obligation: Personal drawings must be formally resolved by the board and included in cash flow forecasts.

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.

Director obligation: ATO obligations must appear in every cash flow forecast and be reviewed at every board meeting. Superannuation is a personal director liability.

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.

Director obligation: No growth strategy should be approved without a board-level assessment of working capital adequacy for the full growth cycle.

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 failure, legal dispute, or economic shock — without becoming insolvent?

Director obligation: The board must formally resolve the minimum UEP level and verify it is maintained. A business with no buffer has no margin for error.

Cash Flow Breakeven

CFBE — The Survival Threshold

At what revenue level does the business cover all its cash obligations? This is the Fairbairn Cash Flow Breakeven — the true survival threshold, not the accounting breakeven. Every director must know this number.

Director obligation: Every director must know the business's cash flow breakeven and monitor actual cash in against it every trading period.

Why Existing Approaches Fail Directors

The gap between what directors receive and what they need.

Traditional financial reporting gives directors historical data. Management forecasts give directors optimistic projections. Neither gives directors what they actually need — an independent, structured, forward-looking solvency assessment they can stand behind in court.

Traditional reporting

What happened last quarter

Historical financial statements. Profit and loss. Balance sheet at a point in time. Useful for accounting — insufficient for director solvency monitoring. By the time the problem appears in the financials, it is often too late.

Management forecasts

What management wants to happen

Prepared by the same team whose performance is being assessed. Subject to optimism bias. Rarely include all obligations. Not independent. Relying solely on management forecasts is insufficient for director duty of care.

The Fairbairn Formula

What the board needs to know

Independent. Structured. Forward-looking. Includes all obligations. Produces a documented record. Aligned with RG 217. Gives every director on every board the evidence they need to discharge their duty of care.

The Research Behind the Formula

Ten years. Multiple failures. One honest question.

Why this formula exists

The Fairbairn 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 BoardSolvency: the first purpose-built platform to implement the Fairbairn Formula for directors and boards of Australian companies.

The formula is freely available. The research is open for critique. The platform makes it automatic.

Stephen Fairbairn · Independent Researcher · Noosaville, Queensland · 2026 · stephenfairbairn@aussiebb.com.au

Research Note — Working Paper — Freely Available

The Fairbairn Formula: Theoretical Basis, Development, and Open Use

The Fairbairn Formula is released for free use by directors, accountants, advisors, and governance practitioners. The formula itself is in the public domain. BoardSolvency is the platform that implements it — automating the calculations and making it accessible to every board regardless of size or resources.

The formula addresses a recognised gap: no structured framework exists that translates directors' legal obligations under Section 588G and ASIC RG 217 (December 2024) into a practical, repeatable test that a non-accounting director can apply at each board meeting. This working paper will be refined through application and peer review. Contributions from directors, practitioners, academics, and regulators are genuinely welcomed.

See the Formula working in real time.

BoardSolvency implements the Fairbairn Formula automatically — no manual calculation, no spreadsheets, no guesswork. Every director. Every board meeting. Every trading period.

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The Fairbairn Formulafor Director Solvency Adequacy