Sign up to our webinar! ‘Future Planning for your clients... AND charging for it’
Register Now

Direct vs Indirect Cash Flow Methods

Direct and indirect are two different methods that are used in preparing the cash flow statement of your company. The main difference between the two methods relates to the cash flows from the operating activities. In the case of direct cash flow methods, changes in cash payments are reported in cash flows from the operating activities section. In the case of an indirect cash flow method, changes in assets and liabilities accounts are adjusted in the net income to replicate cash flows from operating activities.

What is the indirect cash flow method?

The indirect cash flow approach begins with the company's net income, which you may obtain from the income statement, and then incorporates depreciation. Then you should list any changes in current liabilities, assets, and other sources (e.g., non-operating losses/gains from non-current assets) on the balance sheet.

Keep in mind that an income statement is nothing more than a guide. As such, you'll need to make modifications to account for pre-tax and interest income. To determine the company's cash flow for operating expenditures, you'll also need to incorporate non-operating costs like accounts payable, inventory, depreciation, and accrued expenses.

What is direct cash flow?

The direct method is a type of accounting used to produce a full statement of cash flow that documents the changes in cash throughout the period. The direct method cash flow statement, sometimes known as the "income statement method," monitors the movement of money in and out of a firm during a certain time frame.

This technique is used to track changes in cash payments and receipts due to a company's operational activities. It allows businesses to make informed judgments and plan for the future by informing them of their financial position.

Under the direct cash flow method, you take out cash payments—such as those to suppliers, workers, and operations—from cash receipts—such as from customers—during the accounting period. The net financial flow from company operational costs is determined as a consequence of this. You may only include investing and financing activities after net cash flow from operations have been calculated for the period.

Direct vs indirect cash flow

The major distinction between the direct and indirect approaches to creating cash flow statements is cash flows from operating expenditures. You show actual cash outflows and inflows on a cash basis without starting from net income using the direct method. For both direct and indirect cash flow statement preparation, you prepare the financing and investing portions in the same way.

The direct approach affects only the cash flow statement's operations section, while the cash flow from the investing and financing sections will be similar regardless of whether an indirect or direct method is utilized.

The indirect approach is popular among accounting professionals since it is both quick and simple to generate the statement of cash flow utilizing data from the balance sheet and income statement. A credit is an amount owing to you by a company or other entity. Most businesses employ the accrual method of accounting, therefore the balance sheet and income statement reflect this approach. Income is recognized under the accrual system when it is received rather than when payment from clients is received.

Advantages and disadvantages of direct cash flow



The direct cash flow technique highlights the main sources of cash financing and receipts, which might be of use to creditors and investors.

Ease of comprehension

Because this technique separates a company's transactions into two categories: negative, which includes cash outflows like employee compensation and rental payments, and positive, which includes cash inflows such as accounts receivable payouts received and money collected from customers, the direct cash flow method is the most straightforward to comprehend and read. In this manner, the direct cash flow method is very much comparable to a bank statement.  


When comparing cash flows using real-time data, you can be more confident in your numbers.


Effort and time

The direct cash flow method, as its name implies, entails recording all of your financial receipts and disbursements. It may be time-consuming and laborious to keep track of this information.

Advantages and disadvantages of indirect cash flow


Easier to prepare

Because most businesses operate on an accrual basis, the indirect cash flow approach is simpler to execute than the direct method.

Reconciles cash income

The indirect cash flow method compares the company's stated profitability with its accrual-based accounting net cash flow to show the difference between its cash holding position and its declared performance.

Links financial statements

The indirect cash flow approach necessitates the construction of a direct connection between a company's balance sheet and income statement, allowing you to have a more systematic viewpoint on its financial statements.

Discloses non-cash transactions

When utilizing the indirect cash flow technique, non-cash transactions are disclosed, which can help you better understand how non-cash activities contribute to a company's net income but not source of cash flows.


Another disadvantage is that this technique is less transparent. This money flow technique frequently violates some accounting standards and accepted methods.

Watch the Webinar Recording

Start Your Free Trial

Let informed predictions and powerful reporting guide your business. Be ahead of the curve with Futrli.

Get business advice here

Our blog holds tips, how to’s and general business advice.

Futrli News

Futrli's February 2024 Release

This is some text inside of a div block.


Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat.

Futrli News

Futrli's February 2024 Release


3 Apps to beat accounting blues and scale your firm

Chris Downing catches up with three accounting app innovators to discuss the apps that they have developed that directly help accountants.


Where most prediction software falls short

Tread carefully when looking for prediction software. Find out how to dig deeper into your predictions with the tools that count.

Small Businesses

Cash is King! 4 ways to keep your cash flow healthy.

Cash flow is essential to your business’ survival. Read our top 4 tips for taking control of your cash flow.

Small Businesses

10 Common Cash Flow Forecast Hurdles

If there’s one thing that all small and medium-sized enterprises should prioritise, it’s their cash flow. Read on to find out the top 10 most common issues.


Empowering Accountants: How to Embrace Uncertainty with Futrli

The future is far from certain. Find out how Futrli helps accountants wade their way through murky, grey, “This might happen”-type scenarios.

Small Businesses

Inflation affecting your hospitality business? Take back control with these three steps.

Acting quickly is key to ensure you can ride out the incoming storm. Find out more in this article.

Small Businesses

Why cash flow forecasting helps businesses survive downturns in trade

Learn how cash flow forecasting is crucial for surviving slower trading periods.


The 7 reasons why SMEs struggle with cash flow management

Find out the 7 major reasons why your clients’ businesses struggle to achieve a positive, healthy, consistent cash flow.


Take clients from compliance to scenario planning in five steps

Scenario planning helps your clients imagine different environments or realities in the future, guiding the plans and decisions your clients make.


Flash reports and why to build them

This short guide covers what Flash Reports are and how you could use them as a speedy solution for your clients’ reporting needs.

Small Businesses

Head of Accounting and Futrli COO discuss challenges and solutions for small businesses.

Read Dan and Helen’s thoughts on how SMEs can protect themselves during what is set to be a challenging year.