You're chasing an overdue invoice while working out which supplier to pay first. The tax bill hasn't gone away, and another loan repayment is coming up.
A difficult week? Maybe. But if this is becoming the usual way of running your business, it's worth looking more closely.
Cash flow pressure doesn't automatically mean insolvency. The question is whether your business can pay its debts when they're due, and what you should do if you're worried it can't.
Here's what to watch for, what trading while insolvent means and when to bring your accountant and an insolvency lawyer into the conversation.
What is trading while insolvent?
Trading while insolvent, also known as insolvent trading, generally involves a company incurring debts while it is unable to pay its debts as and when they fall due.
Directors have a duty to prevent insolvent trading under section 588G of the Corporations Act 2001 . That means staying informed about the business's finances and considering its ability to pay before taking on new debts. Directors who fail to act may face civil penalties, compensation claims, or even criminal charges if dishonesty is involved.
These rules only apply to directors of companies. If you run your business as a sole trader, different rules apply.
Cash flow problem or insolvency? Look beyond the bank balance
A low bank balance doesn't tell the whole story. Neither does a healthy sales pipeline.
You might have money tied up in stock or customer invoices. You might be profitable on paper but have bills falling due before customers pay. Equally, a busy business can keep bringing in revenue while its debts grow.
The question isn't simply, "Is there money in the account today?" It's whether the business can meet its debts when they're due, taking its full financial position into account.
That's why a cash flow forecast matters. It helps you see what needs to be paid, when cash should arrive and where the gaps may be.
Warning signs of business insolvency
Financial pressure can build gradually. You might start by delaying a supplier payment, then find yourself doing the same thing the following month.
Signs your business may be insolvent
- Overdue payments: Tax, super, wages, suppliers or loan repayments are regularly falling behind.
- Juggling bills: You're deciding who gets paid based on who is chasing hardest, rather than agreed payment terms.
- Funding everyday costs with emergency money: Personal funds, extra borrowing or customer deposits are repeatedly needed to keep operating.
- Less room with lenders or suppliers: Your overdraft is at its limit, finance is harder to obtain or suppliers want payment upfront.
- Losses that aren't improving: More sales aren't translating into enough cash or profit to meet commitments.
- Trouble collecting money: Overdue invoices or customer disputes are leaving you short when your own bills fall due.
- Formal demands: Creditor demands, solicitor's letters or court documents have started arriving.
One sign on its own doesn't mean a business is insolvent. If the pressure is ongoing or you're seeing several of these signs, check the business's full financial position and get professional advice.
Don't put tax and BAS obligations in the too-hard basket
If you can't pay your ATO debt , it can be tempting to avoid dealing with the paperwork too. But payment and lodgement are separate obligations. Leaving BAS or other reporting overdue can make matters more complicated.
Company directors can be personally liable for certain unpaid tax and super liabilities, including PAYG withholding, GST and superannuation guarantee charge. Reporting and lodgement history can affect their options under the director penalty regime.
If you receive a director penalty notice , don't wait for the next accounting meeting. The type of notice and whether relevant obligations were reported on time can affect your options, so get advice as soon as one arrives.
Intercompany loans and risks across business groups
If your business operates through several entities, look at each entity's position rather than assuming the group bank balance tells the full story.
For example, one business might have lent money to a related business and be relying on repayment to meet its own bills. Can that money be repaid when needed?
An unsecured intercompany loan isn't proof of insolvency, but it’s worth checking that the balances and arrangements are clear.
If one business owns equipment used by another, there may also be Personal Property Securities Act (PPSA) issues to consider. Our guide to intra-group asset risks explains why the right agreements and registrations matter.
Your accountant and lawyer can help review the financial and legal position together.
What should you do if you're concerned?
Start by getting the records together and speaking with your advisors. The earlier you understand the position, the sooner you can make informed decisions. You don't need a perfect spreadsheet before making the call, but current information helps.
Useful records include bank balances, outstanding customer invoices, bills due, tax accounts, finance agreements and related-party balances. Be clear about overdue wages or super, creditor demands and any commitments you're about to make.
If you suspect the business can't meet its debts, get advice before taking on further obligations. Don't assume another loan or a transfer of assets will solve the problem.
Don't ignore creditor demands or tax notices. Avoid transferring business assets, repaying related parties or making unusual payments to selected creditors without advice. A liquidator may later review some transactions, and directors have duties when a company is under financial pressure.
Keep records of the advice you receive and the decisions you make. Getting support doesn't remove your responsibilities as a director.
What options are available if your business is in financial difficulty?
The right response depends on the business’s position and whether it can keep operating. It may involve changes to costs or operations, discussions with creditors, refinancing or a formal process such as small business restructuring or voluntary administration. If the business isn’t viable, liquidation may need to be considered.
For eligible companies, small business restructuring may allow directors to stay in control while proposing a plan to creditors. There are specific eligibility and compliance requirements, so get advice before assuming it’s an option.
These processes have different rules and consequences. They aren’t steps every business moves through in order. A specialist advisor can explain what may be available and what it means for the business, its directors and creditors.
Get a clearer picture before the pressure builds
If you're worried about cash flow or trading while insolvent, BlueRock Law can help you understand the numbers and your responsibilities as a director. We'll work together to help you assess your position and consider the next steps. Get in touch via the form below.
Disclaimer: The information in this article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.
