Can a profitable business become insolvent?

A profitable quarter has not funded next week’s salaries

A software consultancy reports a profit for the quarter, but most of its invoices remain unpaid. Salaries and tax fall due before the customer receipts expected next month. The director takes comfort in the profit figure and agrees to another contractor engagement. The question is whether the company can fund that commitment alongside the debts it already has.

Understand what the profit report contains

Ask the accountant which income has been recognised but not collected and which expenses have not yet been paid. Identify estimates, adjustments and any unusually large invoice affecting the result.

A profitable report is useful evidence about trading, but it does not show the bank balance on each due date. Avoid using it as a shortcut for a decision it was not designed to answer.

Put debts and resources on a timetable

List when liabilities must be paid and when funds can realistically become available. Separate confirmed receipts and committed facilities from disputed invoices, prospective sales and finance applications.

ASIC describes insolvency in terms of paying due debts. Apply that question to the company’s actual circumstances with a qualified adviser, rather than diagnosing the business from one accounting ratio.

Source: ASIC — Insolvency for directors

Test what happens if customers are late

Identify the largest receipts supporting the next operating period. Check the evidence for their timing and prepare a delayed-collection case. Include the cost of completing work needed to earn future invoices.

If ordinary delays make wages or suppliers unpayable, investigate funding and operating changes immediately. Do not describe the problem as harmless solely because the delayed work remains profitable on paper.

Use the two views together

Review the profit result and cash timetable side by side. The first may show that the service earns a margin; the second may reveal unsustainable collection terms or an unfunded growth plan.

Record the decisions, funding assumptions and review date. Seek advice promptly where payment ability is doubtful, before a reassuring profit report supports another unsupported commitment.

Test payment ability alongside reported profit

Reconcile recognised income with actual collections.

Map due debts against dependable resources.

Review profitability and solvency as separate, connected questions.

Call CRP today to coordinate a review of profitable trading that is still producing payment pressure.