Is Your Business Solvent? How to Assess Your Financial Health
Running a Business is Tough—But Is Yours Financially Healthy?
Running a business isn’t just about bringing in sales; it’s about making sure your company is financially stable. But how do you really know if your business is solvent? And what should you do if it’s not?
Understanding solvency is key to staying ahead of financial troubles. Think of it as a health check for your business—if you catch the warning signs early, you have more options to turn things around. So let’s break it down in a way that actually makes sense.
What Does It Mean to Be Solvent?
A solvent business is one that can meet its financial obligations on time and has more assets than liabilities. In simple terms, if you can pay your bills and still have some financial breathing room, you’re in the clear.
There are two key solvency tests to determine if your business is in good shape:
The Cash Flow Test – Can your business pay its debts when they’re due?
The Balance Sheet Test – Are your total assets greater than your total liabilities?
Failing either of these tests could mean trouble ahead. But don’t worry—if you catch it early, there are plenty of ways to get back on track.
The Cash Flow Test: Are You Paying Bills on Time?
The cash flow test checks whether your business can pay its financial obligations as they arise. Ask yourself:
Can you pay suppliers, employees, and loans on time?
Do you regularly extend payment deadlines or negotiate with creditors?
Are you dipping into personal savings or taking out new loans just to cover expenses?
Do you have enough cash reserves to manage unexpected costs?
If you’re struggling to keep up with payments, it could be a sign of cash flow insolvency—a problem that can spiral quickly if left unchecked.
The Balance Sheet Test: Are Your Assets Greater Than Your Debts?
The balance sheet test looks at your business’s overall financial health. If your total assets (cash, equipment, stock, accounts receivable) are greater than your total liabilities (loans, unpaid bills, tax obligations), you’re financially stable.
Quick Balance Sheet Check:
Review your latest financial statements.
Compare total assets vs. total liabilities.
If liabilities exceed assets, your business may be in financial trouble.
If you fail both the cash flow and balance sheet tests, it’s time to take action before financial stress turns into full-blown insolvency.
Solvency Checklist: Is Your Business on the Right Track?
Want to quickly assess your financial health? Tick off the boxes below—the more you check, the stronger your business is.
[ ] I can pay all invoices, wages, and loans on time.
[ ] I have more assets than liabilities on my balance sheet.
[ ] My business is not relying on new loans just to stay afloat.
[ ] I have enough cash reserves for unexpected expenses.
[ ] My tax obligations (ATO, superannuation) are up to date.
[ ] I am not receiving debt collection letters or legal warnings.
[ ] I have clear financial records and know my profit margins.
[ ] My business is profitable (or on track to be).
If you couldn’t check off at least five boxes, it’s time to take a closer look at your business’s financial health.
Warning Signs Your Business May Be Insolvent
If you’re still unsure about where you stand, watch out for these red flags:
Struggling to pay bills and wages on time
ATO debts, unpaid superannuation, or tax payments falling behind
Creditors sending demand letters or threatening legal action
Taking on more debt to pay off existing debt
Customers delaying payments, causing cash flow issues
No up-to-date financial records or unclear profit margins
If any of these sound familiar, it’s time to act now before things get worse.
What to Do If Your Business is At Risk
If you’re starting to see signs of financial distress, don’t ignore them—the earlier you take action, the better. Here’s what you can do:
1. Seek Professional Advice
Talk to an accountant, business advisor, or insolvency expert who can help you assess your situation and explore solutions.
2. Improve Cash Flow
Follow up on overdue invoices.
Negotiate better payment terms with suppliers.
Cut unnecessary expenses.
Look at financing options only if it makes sense.
3. Consider a Business Restructure
If your business has potential but is drowning in debt, you may qualify for a Small Business Restructure (SBR), which allows you to renegotiate debts while continuing to trade.
4. Understand Your Legal Responsibilities
Trading while insolvent can have serious legal consequences. If you’re at risk, seek professional guidance before creditors take action.
Need Help Assessing Your Business’s Financial Health?
Understanding whether your business is solvent isn’t just about avoiding insolvency—it’s about making informed, strategic decisions that keep your business on track for long-term success.
If you’re feeling uncertain about your financial position, now is the time to act. We help business owners:
Assess their financial health
Navigate debt restructuring options
Develop strategies to regain control
Book a confidential consultation today and get clarity on your next steps.
Regular financial checkups aren’t just for big corporations—every business should keep a close eye on its solvency. The earlier you spot potential issues, the more options you’ll have to fix them.
So, how did your business do on the solvency checklist? If you’re unsure, get in touch today—we’re here to help you navigate your next steps with confidence.