Create a cash flow statement: direct and indirect methods of cash flow

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Create a cash flow statement: direct and indirect methods of cash flow

When understanding your business’s financial situation, Cash flow statement Is one of the most important resources. The cash flow statement is a summary of your company’s cash inflows and outflows from three main areas: 1) operations, 2) investments, and 3) financing.

With you Proof of income And balance sheet, cash flow statement allows you to better understand your business Financial health, Including your profitability and consumption habits.

Figure out how Calculate cash flow It may seem tricky, but in practice it is quite simple.There are two methods for preparing the cash flow statement: direct cash flow method and cash flow method Cash flow indirect method.

Direct and indirect methods of cash flow

Two methods Cash flow analysis Generate the same total cash flow, but the information is presented in a different way. However, the difference only applies to operating cash flow. Whether you use the direct method or the indirect method of the cash flow statement, the investment and financing parts are presented in the same way.

along with Direct cash flow method, You only calculate the funds that actually left or entered your business during the specified reporting period. To do this, you start with a blank sheet of paper, and then add and subtract all of your company’s operating cash transactions. These transactions may include receipts from the sale of products or services, Payroll, Rent, supplier payment or material costs.

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This Cash flow indirect method use Accrual accounting, Which means that you record your income and expenses when the transaction occurs, not when you actually lose or receive funds. Using the income statement, you can use the company’s net income as a basis. From there, you can refer to changes on the balance sheet to increase and decrease your net income. Remember that the indirect method takes into account non-cash factors such as depreciation, while the direct method does not.

Why use the indirect cash flow method?

Although the Financial Accounting Standards Board generally prefers the direct approach Cash flow statement, Both the direct and indirect methods of cash flow conform to generally accepted accounting principles (GAAP).

However, direct methods can be tedious and time-consuming, which is why business owners tend to choose indirect methods. In addition, since most companies have used accrual accounting to record their financial information, the use of indirect methods to calculate operating cash flows can be consistent.

How to calculate operating cash flow

The operating cash flow of your business is the first part of the cash flow statement.operate cash flow Shows how much net cash your business generates from daily business operations, which is why it is a good indicator of your company’s profitability.

Positive operating cash flow It means that your income from your core business exceeds your expenses. On the other hand, negative operating cash flow may indicate that you need to re-adjust your pricing model, reduce expenses, or apply for funding.

The operating cash flow calculation formula is:

Operating cash flow = net income + depreciation-changes in assets and liabilities

Below, we will explain how to put this formula into practice step by step.

How to use the indirect method to create a cash flow statement

You can use an Excel spreadsheet to prepare your Cash flow statement, Or check the resources and templates provided by your accounting software. No matter which route you choose, make sure you have the latest income statement and balance sheet for reference.

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Step 1: Record your net income and adjust non-cash expenses

First record your net income during the relevant reporting period. Calculating net income requires subtracting your business expenses, operating costs, and taxes from your total income.

Next, adjust your net income to account for non-cash expenses, such as asset depreciation.

Step 2: Adjust assets

Watching you Balance sheet, Adjust your net income according to the increase or decrease of assets.Your assets include accounts receivable, Inventory, property, stocks and cash.Generally speaking, increasing your assets (except cash) will reduce your Full cash flow, And the decrease in your assets will increase your cash flow.

For example, if you buy commercial real estate, you will accumulate another asset, but the amount of cash you have will decrease.

Step 3: Adjust liabilities

After accounting assets, Adjust your net income based on changes in your liabilities (such as accounts payable, expenses, and debt). Remember, reducing your debt (for example, paying a loan) will reduce your cash flow.

On the other hand, increasing your liabilities in the form of credit (such as adding supplier payments to accounts payable) may increase your cash flow or maintain stability.

Step 4: Including investment and financing cash flow

To complete the cash flow statement, you need to include Direct cash flow From your investment and financing activities. Investment activities may include buying and selling property or equipment, or issuing or repurchasing common stock.This Financing Part of it describes activities such as repaying debts and selling company stocks.

The net change in cash flow is the sum of all three parts of the cash flow statement.

Cash flow example statement


increase or decrease)

Operating cash flow
net income500,000 USD
depreciation(20,000 USD)
accounts payable(40,000 USD)
accounts receivable 35,000 USD
Operating net cash475,000 USD
Investment cash flow
Equipment sales5,000 USD
Common stock purchase(15,000 USD)
Net cash investment(10,000 USD)
Financing cash flow
Loan payment(5,000 USD)
Financing net cash(5,000 USD)
Total net cash460,000 USD
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How to use the direct method to calculate operating cash flow

If you use the direct method to calculate operating cash flow, you need to look at all cash transactions in a given time period. Your business’s cash transactions fall into one of the following two groups: cash receipts (the cash you receive) and cash payments (the expenses you pay in cash).

Cash transactions can include the following:

  • Cash received from customer sales or payments
  • Cash paid to suppliers or suppliers
  • Cash payment for operating expenses (such as wages, rent, utilities, etc.)
  • Pay taxes in cash
  • Cash received from interest, tax rebates or other activities

Add your total cash income and subtract your total cash payments, and you will get the net cash flow from operating activities.

Use your cash flow statement to succeed

The cash flow statement is an important part of your company’s collective financial statements. Regularly checking your finances can give you a better understanding of where your business is doing the right thing, and where you might need to improve.

For example, if you find that you need more cash flow to cover operating expenses, please consider applying for Fundbox credit limit. If you are approved, you can get funds as soon as the next business day.

Disclaimer: Fundbox and its affiliates do not provide financial, legal or accounting advice. This content is for reference only and is not intended to provide and should not be used as a basis for financial, legal or accounting advice. You should consult your financial, legal or accounting advisers before making any transactions.

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