A position paper for governance professionals, legal practitioners, and accountants evaluating the BoardSolvency platform.
BoardSolvency is not a financial reporting tool. It is a director governance workflow built on seven years of independent research into why Australian businesses fail and what directors can do — legally and practically — to prevent it. This document sets out the research foundation that underpins the platform, its methodology, and its relevance to Australian directors' legal obligations under the Corporations Act.
It is written for governance professionals who need to satisfy themselves that BoardSolvency is grounded in rigorous research before recommending it to directors, boards, or clients. For the founder's own account of the research journey — including the personal experience that started it — see The Research Behind BoardSolvency.
Module Summary
Australian business failure is predominantly a cashflow problem, not an operational one. Directors don't typically close their businesses because they fail personally — they close because creditors withdraw support when cashflow becomes unsustainable. No existing tool translates financial statements into a director-ready solvency assessment. That's the governance gap.
Section 588G creates a non-delegable duty to prevent insolvent trading. ASIC's updated RG 217 (December 2024) makes clear that only directors who maintain regular, documented solvency monitoring can access the Safe Harbour defence under 588GA. Demonstrating that the Sustainable Cashflow Formula was applied — tested, breakeven identified, board report generated — is directly relevant to that defence.
The integration of these streams resolves an anomaly Christensen identified but never fully explained: why businesses fail even when serving customers well. They fail because the revenue required to meet every cash obligation is itself an unknown that must be specifically calculated — and no existing tool performed that calculation at governance level.
All Cash IN ≥ All Cash OUT, where Cash OUT = operating expenses + capital loan repayments + ATO obligations + drawings and private costs + reserve provisions. See The Formula for the full framework.
A three-step workflow: Analyse (test the historical position), Breakeven (calculate the Sustainable Cashflow Breakeven), Board Report (generate a defensible, contemporaneous record). BoardSolvency does not provide legal advice — it produces the documented evidence of solvency testing that Safe Harbour and any subsequent regulatory review would look for.
Australian business failure is predominantly a cashflow problem, not an operational one. Directors are not typically forced to close their businesses because they fail personally — they are forced to close because creditors withdraw support when cashflow becomes unsustainable. This distinction is fundamental to understanding the governance gap.
The governance gap is this: accounting software produces financial statements, but no tool translates those statements into a director-ready solvency assessment. Directors are expected to understand their legal obligations under Section 588G of the Corporations Act, yet they are given no practical instrument to test whether they are meeting those obligations at the board level.
The result is that directors regularly sign off on financial periods without having tested solvency — not because they are negligent, but because no accessible workflow existed to guide them through the process. BoardSolvency is built to close that gap.
Insolvency is a capital structure problem, not an operational failure. Business owners are forced to close by creditors withdrawing support — not by failing personally. The governance obligation is to anticipate this condition before it becomes irreversible.
Stephen Fairbairn — Sustainable Cashflow Research, 2016–2025The legal obligation for directors to prevent insolvent trading is established in the Corporations Act 2001 (Cth) and interpreted by ASIC in Regulatory Guide 217. Together, these instruments create both the duty and the standard by which a director's conduct will be assessed.
A director of a company contravenes this section if the company incurs a debt at a time when the company is insolvent, or becomes insolvent by incurring that debt, and at that time there are reasonable grounds for suspecting that the company is insolvent or would become insolvent by incurring that debt.
The duty applies to all directors — executive and non-executive — and cannot be delegated. Personal liability attaches where a director fails to take reasonable steps to prevent the company from incurring the debt.
ASIC's updated guidance makes clear that directors who maintain regular, documented oversight of solvency indicators are better positioned to avail themselves of the Safe Harbour provisions under Section 588GA. Those who cannot demonstrate active monitoring are not.
ASIC RG 217 specifically identifies the need for directors to monitor cashflow, working capital, and debt service capacity as part of their ongoing governance obligations — precisely the indicators that the Sustainable Cashflow Formula is designed to test.
The Safe Harbour defence available under Section 588GA requires that a director, at the time the debt was incurred, was taking one or more courses of action that were reasonably likely to lead to a better outcome for the company. The ability to demonstrate that the director applied the Sustainable Cashflow Formula — tested solvency, identified breakeven, and generated a Board Report — is directly relevant to this defence.
BoardSolvency does not provide legal advice. However, the documented output of the three-step governance workflow constitutes a contemporaneous record of director engagement with solvency analysis that is directly relevant to any subsequent review by ASIC, a liquidator, or a court.
The Sustainable Cashflow Formula rests on four intersecting research pillars: the theory of disruptive innovation, the cashflow management literature, the capital structure research on business failure, and the startup-failure literature that documents the same gap from the US venture-backed sector. Each pillar contributed to the development of a formula that is both academically grounded and practically applicable by non-specialist directors.
Prof. Clayton Christensen's research on why established businesses fail when disrupted by simpler, cheaper solutions — and the Jobs to be Done framework that defines what customers truly need.
The academic and practitioner literature establishing that business failure is predominantly a cashflow problem — and that sustainable cashflow requires testing all cash OUT against all cash IN.
Research establishing that insolvency is a capital structure problem — creditors withdraw support before operational failure, meaning directors must monitor debt service capacity proactively.
Prof. Tom Eisenmann's 30-year Harvard study of startup failure — rigorous at scale, yet never isolating the cashflow mechanism this research identifies.
Professor Clayton Christensen of Harvard Business School devoted decades to researching why well-managed, successful companies fail when confronted by new market entrants. His foundational work — The Innovator's Dilemma (1997), Competing Against Luck (2016), and The Innovator's DNA (with Dyer and Gregersen, 2019) — established the theoretical basis for understanding how disruptive innovation succeeds by addressing what customers actually need, not what established providers assume they need.
Disruptive innovation succeeds by offering simpler, cheaper, more accessible solutions to customers who are frustrated by the complexity and cost of existing products — and by doing so consistently, at the point of need.
After Clayton Christensen, The Innovator's Dilemma, HBR Press, 1997Christensen's Jobs to be Done (JTBD) framework is directly applicable to the BoardSolvency context. Directors do not need a complex financial reporting platform — they need a simple, consistent, affordable workflow that tells them whether their company can meet its obligations before the board signs off. That is the job to be done. Existing accounting software (designed for accountants and bookkeepers) does not do this job. BoardSolvency does.
Christensen's observation that established corporations are disrupted by solutions that are initially dismissed as too simple is precisely the competitive position BoardSolvency occupies relative to the existing professional services market for insolvency advice. Directors currently rely on expensive practitioners who are typically engaged after the crisis has developed. BoardSolvency is the proactive alternative — affordable, accessible, and director-controlled.
Professor Amy Edmondson of Harvard Business School has spent decades researching how complex organisations — hospitals, airlines, surgical teams, flight crews — manage errors that cannot be predicted in advance. Her foundational work, culminating in The Right Kind of Wrong (Cornerstone Press, 2023), establishes a taxonomy of errors: simple errors (slip-ups against known rules), bad errors (deliberate violations), and intelligent errors — complex failures where the answers are not known in advance and must be discovered through careful, hypothesis-driven investigation.
Intelligent errors involve careful thinking, don't cause unnecessary harm, and generate useful learning advances to our knowledge. The answers are not known in advance — they need to be discovered. They are the only type of failure worth celebrating.
After Amy Edmondson, The Right Kind of Wrong, Cornerstone Press, 2023, p.11Edmondson's research was directly relevant to Stephen Fairbairn's seven-year investigation into why Australian businesses fail. The parallel is exact: just as nursing teams and flight crews face complex operating systems where critical variables are initially unknown and must be discovered through structured process, a director forecasting future cashflow faces a system where each component of the Cash OUT equation is initially unknown and must be researched and quantified before the required Cash IN can be determined.
Edmondson's work gave Fairbairn the conceptual language to articulate what had previously been difficult to express: that business cashflow forecasting is a complex error management problem, not a simple arithmetic one. Each side of the Sustainable Cashflow Formula — Cash IN and Cash OUT — contains unknown unknowns that must be specifically identified and resolved before the formula can yield a meaningful solvency answer. This is not a limitation of the formula; it is its defining characteristic.
The application to director governance is direct. Directors who sign off on financial periods without having tested solvency are not necessarily negligent — they are operating in a system where the tools to surface the unknown unknowns have not previously existed. BoardSolvency provides those tools, guiding the director through the structured process of identifying and quantifying each component of the cashflow equation — the same disciplined approach that Edmondson's research shows is essential in complex, high-stakes operating environments.
Professor Roger L. Martin, former Dean of the Rotman School of Management and strategic advisor to the CEOs of major corporations including Procter & Gamble, contributes the second critical element of the Sustainable Cashflow Formula's theoretical foundation: the distinction between planning and strategy, and the concept of integrative thinking as a method for resolving apparently irresolvable contradictions.
In A New Way to Think (Harvard Business Review Press, 2022) and in his widely cited HBR article "A Plan is Not a Strategy" (June 2022), Martin establishes that a strategy forecasts what would have to be true — not what is true. This distinction is fundamental to the Sustainable Cashflow Formula. Conventional financial budgeting is a plan: it projects known historical data forward. The Sustainable Cashflow Formula is a strategy: it asks what revenue would have to be generated for the business to remain solvent, and works backwards from the obligations that must be met to determine that figure.
A strategy forecasts what would have to be true, not what is true. In testing the forecast unknowns, we find new causes for more effective data estimating.
After Roger L. Martin, A New Way to Think, Harvard Business Review Press, 2022, p.55Sharissa Newton of the Centre for Effectiveness, building on Martin's framework, articulates the building blocks of good strategy in her article "Plan vs. Strategy: Is There a Difference?" Newton and Martin converge on the insight that an effective strategy is a flexible, integrative plan to achieve a desired goal under conditions of uncertainty — positioning the business to meet its obligations to customers, creditors and stakeholders, with the capacity to adapt as conditions change. This is precisely what the Sustainable Cashflow Formula achieves in the cashflow governance context.
Martin's work on integrative thinking — the capacity to hold two apparently contradictory models in mind simultaneously and generate a creative resolution that contains elements of both — provided Fairbairn with the method for resolving what Christensen had identified as an anomaly but had not been able to fully explain.
Professor Tom Eisenmann taught entrepreneurial management in Harvard Business School's first-year MBA curriculum for 24 years, defining entrepreneurship as "pursuing novel opportunity while lacking resources" (Eisenmann, Why Startups Fail, Currency, 2021). His 2021 book draws on a research program spanning some three decades, surveying roughly 470 failed ventures alongside a detailed operational history of businesses launched by his own students.
Eisenmann's methodology is substantial. He develops several frameworks to categorise failure at different stages of a venture's life: a diamond-and-square framework for early-stage validation, built on double-diamond design principles; a "six S" framework for late-stage operational failure; and a "cascading miracles" framework describing how ventures compound optimistic assumptions until the accumulated gap becomes unrecoverable.
His early-stage failure categories include "good idea, bad bedfellows" — dysfunctional relationships with key resource providers — "false starts", where founders begin building before validating genuine customer pain, and "false positives", where excessive optimism about market opportunity goes insufficiently tested. His late-stage categories include the "speed trap" (early-adopter success that never generalises to a mature market), "help wanted" (funding shortfalls caused by gaps in the senior team), and the "cascading miracles" pattern itself, where each subsequent growth assumption is simply expected to resolve on its own.
Eisenmann defines venture failure in financial terms — as the point at which early investors will not recover more than they put in — and documents the human cost of closure with unusual candour: founders' grief, shame and guilt, mapped against the five stages of grief, alongside an argument for a founder culture that allows ventures to fail without treating the outcome as a referendum on the founder's worth. His random sample found that of fifty founders who had closed a venture by 2015, 52% had restarted and launched a new venture within five years — evidence, he argues, of the underlying independence and self-reliance that draws people to entrepreneurship in the first place.
What makes Eisenmann's work significant to this research is not only its rigour but its limitation. Despite three decades of documented failures at the world's leading entrepreneurship school, his frameworks describe where founders run out of resources and runway — team gaps, market mistiming, funding shortfalls — without isolating the specific mechanism connecting rapid growth to insolvency: that businesses close because the cashflow required to service growing debt, tax and drawings obligations was never explicitly forecast against incoming cash. Eisenmann does define a "sustainable point" — the moment sales volume generates enough gross profit to cover tax, marketing, overheads and new investment — which sits close to the Sustainable Cashflow Formula's own test, but is expressed in profit terms rather than cash terms, and does not incorporate the capital repayment obligations that this research identifies as the proximate trigger for creditor withdrawal.
In direct correspondence, Professor Eisenmann suggested that his students' accounting grounding came from HBS's first-year "Leading with Finance" course. A review of that course's published syllabus, and of HBS's separate "Financial Accounting" course, shows both are built around interpreting the cashflow statement retrospectively — through case studies pitched at corporate financial managers reading a completed period — rather than constructing it prospectively as a forecast a founder can act on before an obligation falls due. That distinction is the one this research turns on: not reading last period's cashflow statement, but calculating next period's, against every cash obligation the business carries.
That a researcher of Eisenmann's standing, working at this scale over this length of time, reaches a taxonomy of failure modes rather than a single decisive cause is itself telling. It suggests the mechanism this research identifies had not previously been isolated — not in Australia's SME sector, and not in the US venture-backed startup sector that Eisenmann studies.
Section 588G applies with equal force to a listed corporation and a two-year-old startup — the director's duty to prevent insolvent trading does not vary with a company's age, funding stage, or industry norms. But in practice, no regulator proactively monitors or mandates solvency discipline for the small business and startup sector the way, for example, prudential regulation actively supervises banks and insurers before they fail. Enforcement in this sector is almost entirely reactive: banks, private funders, and creditors identify distress and force closure after the fact, followed where relevant by ASIC or ATO penalties — not before it, and not as a matter of routine oversight.
That regulatory vacuum has been filled, informally, by industry culture rather than by governance discipline. A startup that spends against funding it has been told to expect, rather than funding it has actually drawn, is engaging in exactly the "cascading miracles" pattern Eisenmann documents — yet this is frequently described, inside the industry, as normal and even necessary risk-taking rather than as a solvency warning sign. The absence of a mandatory external standard does not change what the law already requires of directors; it simply means that, for now, boards in this sector have to hold themselves to that standard voluntarily, without the external pressure that exists in more heavily regulated industries. BoardSolvency's position is that this is precisely the gap worth closing early, ahead of any future regulatory mandate — not waiting for one to make the case.
The pivotal intellectual moment in the development of the Sustainable Cashflow Formula was the resolution of an anomaly that Christensen himself had identified but had not fully explained. In Competing Against Luck (HarperCollins, 2016, p.224), Christensen observed: "Anomalies do not disprove anything. Rather, they point to something the theory cannot yet explain." And on the same theme: "Good theories teach us how to think; what causes what to happen and to know how things happen."
Christensen and his son were frustrated by the continuing anomaly of business failures despite decades of innovation research. The Jobs to be Done framework explained why customers adopt new products — but it did not fully explain why businesses that serve those customers continue to fail at such high rates. The anomaly pointed to something the theory could not yet explain.
The resolution came through the integration of three research streams: Christensen's JTBD framework (what the director needs done), Edmondson's intelligent error framework (the unknown unknowns that must be discovered through structured process), and Martin's integrative thinking and strategy-as-forecast methodology (how to resolve the contradiction between what is known and what must be determined).
Reading most of Professor Martin's books and articles enabled me to solve the anomaly of Christensen's frustration with continuous business failures. I have incorporated this integrative thinking from both Christensen and Martin. The revenue breakeven level for cashflow is the concept of my integrative thinking of sustainable cashflow.
Stephen Fairbairn — Sustainable Cashflow Research Notes, 2025The Sustainable Cashflow Formula is the resolution of that anomaly. It answers the question that Christensen could not: why do businesses fail even when they are doing the right job for their customers? They fail because the revenue required to sustain the business — to meet all cash OUT obligations including debt service, taxation, drawings, and reserves — is itself an unknown that must be specifically calculated. No existing tool performed that calculation at the director governance level. The Sustainable Cashflow Formula does.
The research literature consistently identifies cashflow failure — not operational failure — as the primary cause of business closure in Australia and internationally. Bernard Salt's analysis of Australian small business identified cashflow as the single greatest risk factor for SMEs.4 Research by Veda (now Equifax) established that late payment cycles are a leading indicator of impending insolvency.5
The critical insight that emerges from this literature — and that is embedded in the Sustainable Cashflow Formula — is that profit-based management is insufficient for solvency governance. A business can be profitable on an accrual basis while simultaneously running out of cash. Directors who rely solely on profit and loss statements for governance purposes are operating with an incomplete picture of their company's solvency position.
Sustainable cashflow requires that all cash IN — from operations, equity, and financing — must equal or exceed all cash OUT — including operating expenses, capital loan repayments, taxation obligations, drawings, and reserve provisions. This is the basis of the Sustainable Cashflow Formula.
A key theoretical contribution of Stephen Fairbairn's independent research is the distinction between operational failure and capital structure failure. Conventional accounts of business failure tend to focus on the operational dimension — declining sales, poor management, market disruption. The Fairbairn research establishes that most Australian business closures are precipitated by creditor withdrawal, not operational collapse.
When a business cannot service its debts — to the ATO, to trade creditors, to lenders — those creditors withdraw credit facilities. Without credit, the business cannot continue operating even if its underlying operations remain viable. This is a capital structure problem: the business lacks sufficient cashflow to service the debt obligations that its capital structure requires.
This insight is practically significant for directors because it means the solvency question must be asked prospectively, not retrospectively. By the time a business is in financial distress, the director's options are severely constrained. The Sustainable Cashflow Formula is designed to surface the solvency question at the forecast stage — before commitments are made and before the creditor relationship deteriorates.
The Sustainable Cashflow Formula emerged from seven years of independent research beginning in April 2016, culminating in the Sustainable Cashflow Manual completed in January 2025. The research drew on personal experience of business failure, the academic literature on cashflow management and disruptive innovation, and the Australian legal framework governing director obligations.
The Formula addresses the fundamental limitation of conventional financial forecasting: it uses future data, not past data, to test whether the income level required to sustain the business is achievable. Conventional cashflow spreadsheets project historical patterns forward — they do not test what revenue the business must generate to meet all its obligations.
The critical innovation in the Sustainable Cashflow Formula is the treatment of each cash OUT component as an initially unknown variable that must be researched and quantified for each operating period. This is conceptually different from conventional budgeting, which works from known expense lines to a projected profit. The Formula works from the obligation side — what must be paid — to determine what must be earned.
This approach was directly influenced by Christensen's observation that successful innovators ask the question from the customer's perspective first — what job needs to be done — rather than from the provider's capability perspective. Applied to director governance: the question is not "what did we earn?" but "what must we earn to meet all our obligations?" The Sustainable Cashflow Formula answers that question.
The Sustainable Cashflow Breakeven is not accounting breakeven. It is the revenue level at which the director can be satisfied that the business will meet all its obligations — to creditors, to the ATO, to lenders, and to its own reserve requirements — for the coming period.
Stephen Fairbairn — Sustainable Cashflow Manual, January 2025The Sustainable Cashflow Formula is implemented in BoardSolvency as a three-step director governance workflow. Each step corresponds to a phase of the solvency assessment: Analyse (test historical three-statement position), Breakeven (calculate the sustainable cashflow target), and Board Report (generate a defensible director record). The workflow is designed so that any director — regardless of financial literacy — can complete it and understand its output.
BoardSolvency translates the Sustainable Cashflow Formula into a director governance workflow that any director can follow. It is not accounting software. It does not replace the work of accountants, lawyers, or insolvency practitioners. It is the instrument by which a director can satisfy themselves — and demonstrate to others — that they have tested solvency before signing off on a reporting period or approving a forecast.
The platform implements the three-step Sustainable Cashflow Formula workflow:
Integrated three-statement analysis of the historical reporting period. Tests whether cash IN covered all cash OUT using the Sustainable Cashflow Formula applied to real financial data.
Calculates the Sustainable Cashflow Breakeven for the forecast period — the minimum revenue required to meet all obligations. Not accounting breakeven. Solvency breakeven.
Generates a director-ready solvency report — a defensible contemporaneous record that the Sustainable Cashflow Formula was applied and solvency was tested before the board signed off.
The platform is designed as a disruptive solution in the Christensen sense: simple, affordable, consistent, and accessible to directors who are not financial specialists. It addresses the job that directors actually need done — testing solvency at the governance level — rather than the job that accounting software is designed to do, which is financial reporting for taxation and statutory purposes.
Accounting software produces the numbers. BoardSolvency tells the director what those numbers mean for their legal obligations.
BoardSolvency is the three-step governance workflow that turns financial data into director-ready solvency decisions — grounded in seven years of independent research, the Sustainable Cashflow Formula, and Australia's director governance framework.
BoardSolvency — Director Governance Platform, 2026For governance professionals evaluating BoardSolvency for recommendation to directors, boards, or clients, the platform offers a documented, repeatable, legally-relevant process that is aligned with the obligations established by Section 588G and the standards articulated in ASIC Regulatory Guide 217 (December 2024). It is the first platform of its kind in the Australian market.