When Cashflow Gets Tight, Is Redundancy Really Your Only Option?

New ASIC data shows Australian business insolvencies are up roughly 75% on pre-COVID levels, and almost 95% of the businesses going under have fewer than 20 staff. Cashflow, not lack of demand, is the number one reason cited.

A recent SmartCompany opinion piece by Mark Lawry makes the case that small businesses have been treated as an unofficial bank, financing customers through extended payment terms while their own wages, super and tax obligations fall due on schedule. It is a fair point, and worth reading in full.

What that article does not cover is what happens inside the business while the cashflow squeeze is playing out. Because for most founders, the first place the pressure shows up is not the balance sheet. It is the staffing decision they did not want to make yet.

Why does a cashflow problem turn into an HR problem?

When money is tight, wages are usually the biggest controllable cost on the ledger. So the instinct is to act on it fast: freeze hiring, cut hours, let someone go, or hold off on that pay review you promised in January.

The trouble is, staffing decisions made under cashflow pressure are also the ones most likely to go wrong. Rushed redundancies, informal stand-downs, and “we will sort the process out later” decisions are exactly the pattern that ends up in front of the Fair Work Commission.

A cashflow crisis does not pause your legal obligations. It just makes it more tempting to skip steps.

What happens when a business freezes hiring or cuts staff to survive a squeeze?

A few patterns show up again and again with founders under pressure:

• Redundancies get called before the role is genuinely redundant, because the real reason is cost, not a change in the job.
• Consultation gets skipped or rushed, because the owner is focused on the invoice that has not landed, not the process.
• Remaining staff pick up the workload with no plan, which drives burnout and turnover six months later.
• Good people are let go because they are the easiest exit, not because the business genuinely does not need the role.

None of that is a criticism. When you are staring down a cashflow gap, HR process is not the first thing on your mind. But it is the thing that determines whether the decision holds up if it is challenged.

Is redundancy actually a fair response to a cashflow squeeze?

It can be, but only if it is a genuine redundancy. That means the role itself is no longer required, not that the business simply cannot afford the person right now. Under the Fair Work Act, a redundancy has to be genuine, and that includes proper consultation and a real look at redeployment options before anyone is let go.

Skip that process because you are moving fast, and you have not saved money. You have created a general protections or unfair dismissal risk on top of the cashflow problem you started with.

What should you check before you make a cashflow-driven staffing call?

• Is this role genuinely no longer needed, or is this actually a cost decision wearing a redundancy label?
• Have you run a proper consultation process, even on a compressed timeline?
• Is there a cheaper, lower-risk option, such as reduced hours, a temporary pause on recruitment, or redeploying someone into a different role?
• Have you documented the commercial reason, separately from any performance issues that might exist?
• Would this decision hold up if the person pushed back?

If you cannot answer these confidently, that is the gap. Not because the decision is wrong, but because the process behind it is not defensible yet.

How can HR Gurus help before cashflow pressure turns into a claim?

This is exactly the kind of pressure-tested decision we help founders work through. We do not tell you no and walk away. We give you a risk-managed path to yes, whether that is a genuine redundancy done properly, a hiring freeze that does not create resentment, or a restructure that protects the business without exposing it.

If cashflow is tight and a staffing decision is on the table, talk to us before you act on it, not after.

FAQs

Can I make someone redundant purely because of cashflow problems?

Not on its own. The role has to be genuinely no longer required. If the job still exists but you cannot currently afford the person, that is a different problem and redundancy is the wrong tool for it.

Do I still have to consult employees before a cashflow-related redundancy?

Yes. Consultation obligations do not disappear because the business is under pressure. Skipping this step is one of the most common reasons redundancies are successfully challenged.

Is a hiring freeze a safer option than redundancies?

Usually, yes, from a risk perspective. A freeze slows cost growth without the legal exposure that comes with getting a redundancy process wrong. It is not free of risk either, particularly around workload and remaining staff, but it buys you time to plan properly.

What is the biggest mistake founders make when cashflow is tight?

Moving on a staffing decision before working out whether it is genuinely a redundancy, a performance issue, or simply a cost problem. Each of those needs a different process, and mixing them up is where the risk sits.

Cut through the BS. If cashflow is putting pressure on your staffing decisions, get advice before you act, not after the fact.