Bookkeepers occupy an unusual position in a client's financial life: they see the numbers every week or month, often long before the client themselves fully grasps what those numbers mean. When a business starts moving toward insolvency, the bookkeeper frequently sees it first.
Understanding what to look for — and knowing when and how to raise it — is one of the most important skills a bookkeeper can have. It's also an area where the line between professional responsibility and overstepping becomes genuinely important to navigate.
What "Insolvent" Means in Australian Law
Under the Corporations Act 2001, a company is insolvent if it cannot pay its debts as and when they fall due. This is the "cash flow test" — the primary test of insolvency in Australia. A company can be insolvent even if its balance sheet shows more assets than liabilities, if it cannot access those assets quickly enough to meet current obligations.
There is also a balance sheet test (assets exceed liabilities), but it is secondary. Cash flow is what matters in the moment.
Directors of an insolvent company have an obligation to prevent the company from incurring further debt if they have reasonable grounds to suspect insolvency. A director who allows the company to incur debt while insolvent can be personally liable for those debts under s.588G of the Corporations Act — this is insolvent trading.
Warning Signs to Watch For
These patterns, individually or in combination, warrant an early conversation:
Creditor stretching — the client's average creditor days increasing month-on-month. If they used to pay suppliers in 30 days and it's now 75, the underlying reason matters. Is it a cash shortfall, or simply poor payment management?
ATO debt accumulating — unpaid BAS, PAYG withholding, or superannuation guarantee charges. SGC debt is particularly serious because it is a priority creditor and carries significant penalties. Seeing ATO payment plans or running balances is a signal.
Inability to meet payroll — any situation where the client asks whether a payroll can be "deferred" or asks you to hold off processing. Failure to pay wages is both an employment law issue and a strong indicator of cash flow insolvency.
Overdraft at limit — a bank account that is consistently at or near the overdraft limit, with little headroom to absorb unexpected outflows.
Key debtor not paying — a single large receivable that has become significantly overdue. A business with otherwise reasonable cash flow can become technically insolvent if a major customer stops paying.
Creditor calls and disputes — suppliers threatening to stop supply, legal demands, or disputes about whether work was completed. These show up in the inbox before they show up in the accounts.
Director loan account in significant debit — a director drawing heavily on the company while the company itself is struggling. Combined with weak cash flow, this can indicate the director is treating the company as a funding source rather than a trading entity.
Declining gross margins — if GP% is eroding steadily, the business may be unable to sustain its fixed cost base, even if revenue looks stable on the surface.
Your Role as a Bookkeeper
Bookkeepers are not insolvency practitioners and should not provide advice about whether a company is insolvent or what the directors should do about it. That advice belongs with qualified insolvency practitioners, restructuring advisers, and the company's legal advisers.
What bookkeepers can and should do:
Flag the numbers accurately and promptly. If you see the signs above, make sure the client is aware of what the accounts are showing — not as a scare tactic, but as professional communication of facts. "Your creditor days have increased from 30 to 78 over the last quarter" is a factual observation, not legal advice.
Recommend specialist advice. If the patterns suggest genuine financial distress, recommend the client speak with their accountant and, if appropriate, an insolvency practitioner. Early advice is dramatically better than late advice — restructuring options available at six months' distress are far fewer at six weeks.
Document your communications. If you raise concerns with a client verbally, follow up in writing. If a client dismisses your concerns and continues incurring debts, your documentation may be important later — either for your own protection or as part of a restructuring investigation.
Do not continue to process transactions that you believe are being used to avoid creditors. If a client asks you to help move assets, make unusual payments to related parties, or delay processing creditor payments in a way that appears designed to preference certain creditors, step back and seek advice.
The Superannuation Obligation
One specific area where bookkeepers have direct practical importance: superannuation guarantee contributions. SGC must be paid on time to the correct funds. When a company is in financial distress, SGC is sometimes the first payment to be deferred — because unlike wages, it doesn't generate an immediate complaint.
But SGC debt compounds quickly: the SGC charge (if late) is calculated on the gross quarterly wages (not just the unpaid super), and the ATO charges interest at the general interest charge rate. Directors who are outside of a complying SGC regime can face personal liability. If you see SGC payments being deferred, flag it as urgent, not routine.
When the Client Goes into Administration
If a client enters voluntary administration, receivership, or liquidation, the liquidator or administrator will want access to the client's books and records. Bookkeepers should:
- Preserve all records and provide access promptly when requested by the appointed practitioner
- Not delete, modify, or archive records without direction from the practitioner
- Understand that their records form part of the formal inquiry into the company's affairs
The practitioner will be looking, among other things, for evidence of insolvent trading. Your records will be used to establish when the directors knew or ought to have known about the insolvency.
Bookkeepers who see the warning signs and raise them early — professionally, factually, and in writing — are performing one of the most valuable services in their role. The cost of a difficult conversation is small compared to the cost of a preventable collapse.