When you’re running a company, cash flow can move quickly. A big invoice lands late, a customer pays early, a supplier asks for tighter terms, or you decide it’s time to declare a dividend or restructure.
In all of these moments, one concept matters more than most directors realise: solvency - your company’s ability to pay its debts as and when they fall due.
A solvency statement (often prepared as part of board papers, meeting minutes or a solvency resolution) is a practical way to document that you’ve considered the company’s financial position before making key decisions. It can also help demonstrate that directors have taken their duties seriously.
This guide walks you through what a solvency statement is, when you might use one, what to include, and how to prepare it in a way that’s useful (not just “paperwork for paperwork’s sake”).
What Is a Solvency Statement (And Why Does It Matter)?
A solvency statement is a written statement (usually made by directors) confirming that, in their opinion, the company is solvent. In plain English: the company can pay its debts on time, out of available resources, when those debts are due.
It’s worth noting that, in Australia, a “solvency statement” isn’t a single standard-form document required across all companies under the Corporations Act. Instead, it’s commonly used as a governance record or supporting document in situations where directors need to turn their minds to solvency (and prove they did so).
For small businesses, this isn’t just a corporate formality. It’s a risk-management tool. It helps you:
- Make safer decisions (like paying dividends, buying assets, or taking on finance)
- Create a paper trail showing directors considered solvency at the time decisions were made
- Reduce the risk of disputes with shareholders, lenders, suppliers, or insolvency practitioners later
- Stay aligned with director duties, including obligations around insolvent trading
It’s common for a solvency statement to be attached to, or reflected in, a solvency resolution and filed with other company records (for example, board minutes and financial reports).
Important note: a solvency statement is only as good as the work behind it. If the company is actually in trouble, a “template” statement with no real analysis won’t protect you.
When Do You Need a Solvency Statement in Australia?
Not every company prepares a solvency statement every month. But there are several common triggers where it becomes especially useful - particularly for small businesses where directors are also the owners and the decision-making is fast.
Common Situations Where a Solvency Statement Is Useful (Or Expected)
- Declaring a dividend (you’ll want to be confident the company can meet debts after payment, and that you’re meeting the legal requirements for dividends)
- Company restructure or change in control (e.g. share transfers, reorganising related entities)
- Applying for finance or entering new credit arrangements (lenders may ask you to confirm solvency in writing)
- Signing major contracts (particularly if the deal increases your ongoing liabilities)
- Responding to financial stress (late BAS, increasing creditor pressure, ATO payment plans, or repeated cash shortfalls)
- Year-end processes (some companies choose to document solvency alongside annual compliance steps)
In practice, many small businesses use a solvency statement as part of good governance: whenever there’s a significant financial decision, you document why you believe the business can still pay its bills on time.
Solvency Statements vs Solvency Resolutions
People often use these terms interchangeably, but they’re slightly different:
- Solvency statement: the written statement explaining the directors’ view on solvency (and often the basis for that view).
- Solvency resolution: the formal company decision (resolution) recording that the directors have resolved that the company is solvent.
For many companies, the most practical approach is to prepare a solvency statement, then record it via meeting minutes or a written resolution. If you’re documenting decisions, it can also help to keep your execution processes consistent (for example, signing in accordance with section 127 where appropriate).
How to Prepare a Solvency Statement: A Step-By-Step Process
A strong solvency statement isn’t long - but it is specific. It should show that you considered the company’s debts, cash position, and realistic ability to meet obligations as they fall due.
Here’s a practical process you can follow.
Step 1: Confirm What “Solvent” Means for Your Business
Solvency is about timing, not just whether your business is “profitable on paper”. A company can have assets and still be insolvent if it can’t convert those assets into cash in time to pay debts.
When you assess solvency, you’re asking questions like:
- Can we pay wages, super, rent, supplier invoices, and tax on time?
- Do we have sufficient cash (or reliable cash inflows) for the next 30/60/90 days?
- Are we relying on “hope” (e.g. one big sale) to meet debts?
You don’t need a 40-page report, but you do need accurate inputs. Common documents to pull together include:
- Current bank balances (and access to undrawn facilities, if any)
- Up-to-date aged receivables (who owes you, and how late)
- Up-to-date aged payables (who you owe, and when it’s due)
- Cash flow forecast (at least 8-12 weeks, ideally longer if you have seasonal swings)
- Outstanding tax liabilities (GST, PAYG withholding, superannuation, income tax)
- Debt schedules (loan repayments, interest, security arrangements, covenants)
If your company has related-party financing or informal owner funding, make sure you document it clearly. For example, where you’ve advanced funds to the company (or the company owes you money), it helps to understand how a director loan should be treated and recorded.
Step 3: List the Company’s Debts and When They Fall Due
A solvency statement is stronger when it clearly identifies what debts exist and when they are due. Your list might include:
- Trade creditors (suppliers) and standard payment cycles
- Rent and outgoings under your lease
- Employee entitlements (wages, super, leave) and pay run timing
- ATO liabilities and due dates
- Loan repayments (principal + interest), including any balloon payments
- Contingent liabilities (e.g. potential claims, guarantees) where relevant
If you’re relying on a new funding arrangement or formal repayment plan to maintain solvency, it’s often worth documenting it properly (for example, a tailored Loan Agreement rather than an informal arrangement).
Step 4: Assess Your Cash Flow (Not Just Your Balance Sheet)
Solvency is usually won or lost in cash flow.
When you assess cash flow, don’t just assume invoices will be paid “as usual”. Consider:
- What proportion of debtors typically pay late?
- Are any major customers showing signs of financial distress?
- Are there upcoming expenses that aren’t in your usual monthly run rate (insurance renewals, annual software, tax adjustments)?
- Have supplier terms changed (e.g. moving from 30 days to 7 days)?
If you’re planning a dividend, cash flow and profits both matter. Directors generally need to ensure dividends are paid in accordance with the Corporations Act (including that the dividend is paid out of profits and does not materially prejudice the company’s ability to pay its creditors).
Step 5: Stress-Test the Assumptions
This is where directors add real value. A solvency statement should reflect reasonable assumptions and a check on what happens if things don’t go to plan.
Try simple “what if” tests, such as:
- Receivables delay: What if your top 3 customers pay 30 days late?
- Sales drop: What if revenue drops 20% for the next two months?
- Cost spike: What if a key supplier increases pricing or moves to COD terms?
If your company is only solvent in the “best case scenario”, that’s a red flag. A well-prepared solvency statement will either (a) explain why the risks are manageable, or (b) identify what steps you’re taking to manage them.
Step 6: Draft the Solvency Statement (Clear, Specific, Dated)
A practical solvency statement usually covers:
- The statement itself: that the directors believe the company can pay its debts as and when they fall due
- The date of assessment: and the period you considered (e.g. “next 12 months” or “next 3 months”)
- The basis for the opinion: what documents were reviewed (cash flow forecast, payables/receivables, bank balances)
- Any key assumptions: and why they’re reasonable
- Any qualifications: (for example, “subject to customer X paying in line with historical terms”)
- Execution details: director names, signatures, and whether it’s recorded as a resolution/minute
If you’re also preparing board minutes or written resolutions, you may want a consistent format across your company records (including keeping templates aligned with your Company Constitution and any shareholders arrangements).
Step 7: Approve and Store It Properly
A solvency statement should be kept with your company records. Depending on how your company makes decisions, you may record it through:
- Board meeting minutes; or
- A circulating written resolution signed by directors.
Many small companies prefer written resolutions because they’re quick and easy to store. If you’re using a standard format, a directors resolution template can help ensure you don’t miss key details (like dates, signatories, and the exact wording of the decision).
What Should a Solvency Statement Include? (A Practical Checklist)
If you want your solvency statement to be more than a tick-the-box document, make it detailed enough that an outsider can understand what you relied on.
Here’s a checklist you can use.
Core Content
- Company name and ACN
- Date the statement is made
- Director names and positions
- Statement of solvency (ability to pay debts as and when they fall due)
- Time period considered (e.g. 3, 6, or 12 months)
Financial Basis (What You Looked At)
- Bank balances and access to funding
- Cash flow forecast
- Aged receivables and expected collection timing
- Aged payables and payment terms
- ATO position and payment obligations
- Loan repayment schedules
Assumptions and Risk Controls
- Key assumptions (e.g. revenue, margins, debtor days)
- Known risks (e.g. upcoming large expenses, disputes, seasonal dips)
- How you’re managing those risks (e.g. cost reductions, finance approvals, revised trading terms)
In many cases, a short annexure is helpful - like a one-page cash flow summary or a snapshot of payables/receivables.
Common Mistakes Directors Make With Solvency Statements (And How to Avoid Them)
When you’re busy running a small business, it’s easy to rush governance tasks. But solvency documents are one of those areas where “quick” can become “risky”.
Mistake 1: Treating Solvency as “Profitability”
Your accounts might show a profit, but if cash is tied up in unpaid invoices or stock, you can still struggle to pay debts on time.
Fix: focus your solvency assessment on cash flow timing, not just the P&L.
Mistake 2: Using a Generic Template With No Evidence
A statement that says “the company is solvent” without explaining why can look flimsy later.
Fix: reference the documents reviewed and keep them on file.
Mistake 3: Ignoring Tax and Employee Entitlements
For many small businesses, solvency issues appear first through unpaid tax or superannuation.
Fix: explicitly include ATO and employee entitlement obligations in your debt review.
Directors often “float” the company temporarily. If that support isn’t documented, your solvency assessment may be overstated.
Fix: document funding arrangements properly and ensure repayment expectations are realistic.
Mistake 5: Not Updating the Statement When Circumstances Change
A solvency statement is a snapshot at a point in time. If circumstances change materially, directors should reassess.
Fix: treat solvency as an ongoing monitoring exercise, especially during volatility.
Key Takeaways
- A solvency statement is a practical way for directors to record that the company can pay its debts as and when they fall due.
- It’s especially useful when making major financial decisions like paying dividends, taking on new debt, or signing high-value contracts.
- A strong solvency statement is backed by real information: cash flow forecasts, aged payables/receivables, tax obligations, and debt schedules.
- Solvency is mostly about cash flow timing - a profitable business can still be insolvent if it can’t pay debts on time.
- Documenting assumptions and stress-testing scenarios makes your solvency statement far more credible and useful.
- Keeping clear company records (minutes/resolutions and supporting financial documents) helps show directors acted responsibly if the company’s position is ever questioned.
Reminder: This article is general information only and isn’t legal, financial or tax advice. If you’re unsure about your company’s solvency, dividends, or tax obligations, it’s a good idea to speak with a lawyer and your accountant.
If you’d like help preparing a solvency statement or recording it properly in your company records, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
