Proprietary Framework · Stephen Fairbairn · Research 2016–2026
The Sustainable Cashflow Formula
for Director Solvency Adequacy
The Sustainable Cashflow Formula is a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period. It gives every director the one tool they have never had — an independent, continuous, documented answer to the question that matters most at every board meeting.
Module Summary
The Sustainable Cashflow Formula — the essence of it, in two minutes.
The Sustainable Cashflow Formula is a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period. It gives directors a structured, repeatable way to answer the one question that determines their personal legal exposure — and BoardSolvency automates it.
Directors carry personal liability for insolvent trading under Section 588G. ASIC's RG 217 (December 2024) requires active, continuous, independent monitoring. Courts have consistently held that not knowing the company's financial position is not a defence. See The Problem for the full legal case and real board collapses this has caused.
Cash In − All Obligations − Unexpected Events Provision = Solvency Adequacy Score
- Cash flow is the survival metric, not profit.
- All obligations count — debt, tax, drawings, growth capital.
- A cash buffer for the unexpected is mandatory, not optional.
- Forward-looking monitoring must be documented. No record, no defence.
| # | Component | Tests whether… |
|---|
| 1 | Operating Cash Flow Surplus | operations generate more cash than they spend |
| 2 | Equity Adequacy | assets exceed liabilities |
| 3 | Business Debt Coverage | operating cash can service all debt |
| 4 | Personal Obligation Coverage | drawings don't starve the business |
| 5 | Tax and ATO Obligations | tax and super are met on time |
| 6 | Growth Working Capital | growth is funded before revenue arrives |
| 7 | Unexpected Events Provision | a reserve exists for a genuine shock |
| 8 | Cash Flow Breakeven | the true survival revenue threshold |
Traditional reportingHistorical. Tells you what happened last quarter — often too late to act.
Management forecastsPrepared by the same team being assessed. Subject to optimism bias. Not independent.
The Sustainable Cashflow FormulaIndependent, structured, forward-looking — and produces a documented record a director can stand behind.
DSCR (the metric banks use)Tests only whether operating cash covers debt repayments — ignores drawings, ATO obligations, and reserves. A business can pass DSCR while draining its reserves every period. See
The Debt Cycle for the full DSCR breakdown and real case studies.
The Sustainable Cashflow FormulaIndependent, structured, forward-looking, includes every obligation, and produces a documented record aligned to RG 217.
The research remains open for critique. The full framework and automated calculation are a feature of paid BoardSolvency access, for directors and board entities.
"Most directors don't see it coming. The Sustainable Cashflow 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 Sustainable Cashflow Formula — The Balanced Cashflow Test
"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 Sustainable Cashflow 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 Sustainable Cashflow Formula is built on four interlocking principles — each derived from ASIC's RG 217 requirements and the pattern of Australian business closures analysed over ten years of independent research.
01
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.
02
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.
03
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.
04
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.
At its heart, the Sustainable Cashflow Formula is a test of balanced cashflow: is all cash IN equal to or greater than all cash OUT, every trading period. The eight structured components below turn that single test into a complete, board-ready solvency assessment — each addressing a distinct dimension of financial sustainability that directors are legally required to monitor.
01
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.
02
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.
03
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.
04
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.
05
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.
06
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.
07
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 breakdown, 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.
08
Cash Flow Breakeven
CFBE — The Survival Threshold
At what revenue level does the business cover all its cash obligations? This is the Sustainable Cashflow 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 Sustainable Cashflow 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 closures. One honest question.
Why this formula exists
The Sustainable Cashflow 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 Sustainable Cashflow Formula for directors and boards of Australian companies.
The formula is available to paid BoardSolvency directors and board entities. The research remains open for critique. The platform makes it automatic.
Stephen Fairbairn · Independent Researcher · Noosaville, Queensland · 2026 · stevefairbairn4@gmail.com
Research Note — Working Paper — Available to Paid BoardSolvency Directors & Board Entities
The Sustainable Cashflow Formula: Theoretical Basis, Development, and Application
The Sustainable Cashflow Formula's full framework and automated calculation are made available to paid BoardSolvency directors and board entities. 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.