Introduction to Cash Flows
Definition of Cash Flow
Cash flow refers to the movement of money in and out of a business over a specific period. It reflects the company’s ability to generate sufficient cash to meet its operational expenses, invest in growth opportunities, and manage financial obligations.
Importance of Cash Flow in Business
A healthy cash flow ensures a business can sustain operations, pay suppliers and employees, invest in assets, and plan for future growth. On the other hand, poor cash flow management is one of the leading causes of business failure.
Direct Cash Flow Method
What is the Direct Cash Flow Method?
The direct cash flow method provides a straightforward view of cash inflows and outflows by recording actual transactions. This method lists cash received from customers and money paid to suppliers, employees, and other parties, giving a transparent picture of a company’s liquidity.
How to Prepare a Direct Cash Flow Statement
To prepare a direct cash flow statement:
- Start with cash received from operating activities (e.g. customer payments).
- Subtract direct cash payments (e.g. vendor payments, payroll).
- The result is the net cash flow from operating activities.
This method often requires tracking each cash transaction from the general ledger, making it more data-intensive.
Advantages of Direct Cash Flow Method
- Offers greater transparency into actual cash movements.
- Helps identify specific sources and uses of cash.
- More useful for short-term cash planning.
Disadvantages of Direct Cash Flow Method
- Time-consuming and requires detailed records.
- Less commonly used in financial reporting due to its complexity.
- Not aligned with accrual accounting, making it harder to reconcile with the income statement.
Indirect Cash Flow Method
What is the Indirect Cash Flow Method?
The indirect method starts with net income and adjusts it for non-cash items (like depreciation) and changes in working capital. This method reflects how changes in balance sheet accounts affect cash.
How to Prepare an Indirect Cash Flow Statement
To prepare the statement:
- Begin with net income from the income statement.
- Add back non-cash expenses (e.g. depreciation, amortisation).
- Adjust for changes in working capital (e.g. accounts receivable, inventory, payables).
- The outcome is net cash provided by operating activities.
Advantages of Indirect Cash Flow Method
- Easier to prepare from existing financial statements.
- Highlights the relationship between net income and cash flow.
- Widely accepted and used in GAAP and IFRS reporting.
Disadvantages of Indirect Cash Flow Method
- Less visibility into specific cash transactions.
- Can obscure how cash is actually moving in and out of the business.
- May not support daily cash management decisions.
Comparing Direct and Indirect Cash Flow Methods
Key Differences Between Direct and Indirect Cash Flow
| Feature | Direct Method | Indirect Method |
| Basis | Actual cash transactions | Adjusted net income |
| Transparency | High | Moderate |
| Preparation Complexity | High | Low |
| Alignment with Accounting Standards | Low | High |
| Preferred for Internal Cash Management | Yes | Sometimes |
| Preferred for External Reporting | Rarely | Frequently |
When to Use Each Method
Direct Method
Ideal for businesses that require real-time cash monitoring and planning, such as startups, small businesses, or companies with tight liquidity.
Indirect Method
Suitable for financial reporting and for businesses already using accrual accounting systems. Most large companies use this method for consistency and compliance.
How Netgain’s NetSuite Native Solution Helps with Cash Flow Management
Managing cash flow well comes down to having the right tools to forecast, visualise, and act.
Why Choose Netgain?
Netgain’s Cash Flow Management solution, built natively within Oracle NetSuite, empowers finance teams to gain real-time visibility and control over their company’s liquidity. Whether you’re using the direct or indirect method, Netgain’s solution enhances decision-making with smart automation, predictive insights, and centralised dashboards.
Key Features of Netgain’s Cash Flow Solution:
Real-Time Cash Visibility
Easily monitor cash positions across subsidiaries, banks, and currencies.
Dynamic Forecasting
Forecast cash inflows and outflows using historical data, open transactions, and anticipated payments.
Scenario Planning
Model different cash flow scenarios and instantly see their impact.
Automated Reporting
Generate both direct and indirect cash flow statements quickly without the manual effort.
Seamless NetSuite Integration
Since it’s built on the NetSuite platform, data flows directly from your ERP, so you will not need third-party connectors.
Business Benefits:
- Avoid cash crunches with proactive alerts and dashboards.
- Save time by automating the preparation of cash flow statements.
- Enhance board-level reporting with visual, customisable insights.
- Support strategic decisions with confidence and accuracy.
For businesses aiming to make the most out of their NetSuite investment while gaining tight control over cash flow, Netgain provides the tools and intelligence needed to stay ahead.
Conclusion: Choosing the Right Method for Your Business
Both the direct and indirect cash flow methods offer unique advantages. The direct method provides transparency and is useful for internal planning, while the indirect method offers simplicity and is widely used in financial reporting.
The choice ultimately depends on your business size, industry, regulatory requirements, and internal needs. However, regardless of the method, automating and visualising your cash flow through a robust solution like Netgain’s NetSuite-native application can transform how your finance team works — from reactive to proactive cash management.
