Today’s CFOs face a lot of pressure to manage cash flow with precision.
In an uncertain economic climate, executives must ensure their businesses have enough liquidity to meet obligations and seize opportunities, all while minimizing costly surprises.
So, real-time visibility into cash movements is a top priority to enable agile decision-making, and the ideal tool to achieve it is the direct cash flow statement.
Unlike the traditional indirect cash flow statement, a direct cash flow statement reports actual cash receipts and payments from operations, giving full visibility into cash movements.
This approach can equip executive teams with actionable insights, turning cash flow analysis into a strategic advantage rather than just a reporting task.
But how do you make the switch to direct cash flow reporting? Let’s talk about the benefits of direct cash flow statements and how they differ from the indirect method. We'll also look at NetCash's new automatically generated direct cash flow report feature.
Direct vs. indirect cash flow: What’s the difference?
Let's start by defining these two approaches of presenting cash flows.
The direct cash flow method provides a granular view of your business on a cash, rather than accrual, basis, essentially listing all the cash inflows (like cash receipts from customers) and outflows (like cash paid to suppliers) during the period.
This method yields a straightforward report of gross cash receipts and payments, making it the preferred method for the Financial Accounting Standards Board (FASB).
The indirect cash flow method starts with net income (from the accrual income statement) and adjusts for non-cash expenses and changes in working capital to arrive at operating cash flow. The indirect approach doesn’t itemize actual cash transactions.
It's easy to see the appeal of the direct method, but it’s rarely used in practice. In fact, around 98% of companies use the indirect method to report operating cash flows.
Why? Mostly due to convenience and convention.
The indirect method is faster and easier for accounting teams because it uses data readily available from accrual financial statements without needing to trace every cash transaction. This is especially true for large companies with more complex structures.
However, this method has its limitations, as we’ll discuss next.
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Limitations of the indirect cash flow method
Indirect cash flow reports meet Generally Accepted Accounting Principles (GAAP) reporting requirements, but they fall short as a management tool.
Because indirect statements aggregate cash impacts into broad adjustments (like “changes in accounts receivable”), they don’t provide insight into which specific cash streams are driving performance.
So, executives often find the indirect cash flow statement lacking clarity. It’s difficult to gain actionable insights from a statement that simply reconciles net income to net cash.
Knowing these limitations, many CFOs supplement the indirect report with their own direct cash flow analysis for internal use. In fact, finance teams often perform a “bottom-up” cash forecast that mirrors the direct method, pulling data on major cash inflows and outflows to understand the real-time cash picture.
This dual approach highlights a key gap: The indirect statement may be the official report to investors, but savvy executives rely on direct cash flow visibility to actually run the business.
Strategic benefits of direct cash flow statements
A direct cash flow statement is a strategic instrument that can sharpen executive decision-making.
By providing granular, real-time insight into cash movements, direct cash flow reporting improves many aspects of financial management and strategy, including:
Real-time cash management
The direct method supports more agile and accurate cash management on a day-to-day basis.
Instead of waiting until the month-end close is finished to see where cash ended up, CFOs can get real-time visibility into cash flows and liquidity. This enables better short-term forecasting, fund allocation, and contingency planning.
With a direct view of cash inflows and outflows, finance executives can forecast cash positions with more precision and confidence.
See how you can automatically create a direct cash flow report in NetCash.
Operational efficiency
A direct cash flow statement provides a level of detail that can help pinpoint operational bottlenecks and inefficiencies affecting cash.
By breaking down cash outflows and inflows by category (e.g. cash paid to suppliers, cash paid to employees, cash collected from customers), executives can identify which aspects of operations are using up or generating the most cash in each period.
Direct cash flow analysis links operational decisions to their cash impact, helping executives focus on improvements that will make a difference.
Investor confidence
Direct cash flow statements create more transparency for stakeholders by clearly presenting the sources and uses of cash.
Investors, boards, and lenders gain a clearer understanding of a company’s health when they can see exactly how cash is generated and used by operations, rather than just abstract accrual figures.
In fact, research shows that financial statement users prefer the direct method because it provides more informative and digestible data.
Compliance and risk management
From a compliance standpoint, direct cash flow statements can reduce risks related to financial reporting and liquidity management. Having cash flows mapped directly from transactions reduces the chance of manual error.
The traditional indirect cash flow requires numerous adjustments and reclassifications, which can lead to confusion or mistakes. In fact, cash flow statement errors are a leading cause of financial restatements.
By contrast, the direct method ties to actual cash ledger entries, providing a straightforward audit trail.
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So, why aren’t more businesses using direct cash flow statements?
If direct cash flow statements offer such strategic advantages, you may be wondering why they aren’t more widely used.
For decades, companies have argued that preparing a direct cash flow statement would require costly system changes and time-consuming data gathering. This means accountants were trained to produce indirect cash flow statements, and many finance teams simply stick with what they know.
Additionally, most enterprise resource planning (ERP) software has limited support for the direct method.
Nearly all major accounting systems generate cash flow statements using the indirect approach since it relies on readily available general ledger summaries. But producing a direct cash flow statement requires capturing and aggregating transaction-level data for all cash receipts and disbursements.
Another common belief is that whatever additional insight the direct method provides, it’s not worth the burden of preparing it. This was true to some extent in the past, but modern tools like NetCash are changing the game.
It’s now possible to implement direct cash flow reporting without heroic manual intervention. Let’s dive into how.
How NetCash fills the direct cash flow gap in accounting software
One of the biggest reasons companies haven’t widely adopted direct cash flow statements is the technology gap.
Most ERPs and accounting platforms default to producing indirect cash flow statements. The data structures in these systems focus on accrual accounting, so getting to a direct cash flow view is not straightforward.
This means finance teams often have no choice but to use indirect cash flow reports because that’s all their software provides.
NetCash is the only bank reconciliation solution designed by accountants to ensure full visibility into a company’s financial health directly in NetSuite. It allows CFOs and finance teams to automatically generate a true direct cash flow statement without resorting to Excel gymnastics.
Fully embedded in NetSuite, NetCash pulls financial data in real time, capturing transactions like cash collections from customers, payments to suppliers, payroll outflows, and tax payments directly from bank feeds or subledgers. It then categorizes these flows and compiles the statement of cash flows using the direct method as soon as bank reconciliation is complete.
By automating what used to be manual, NetCash dramatically reduces the effort required to adopt direct cash flow reporting. Now, accounting teams can get direct cash flow reporting on day one of the close. This not only saves time, but it also ensures accuracy by eliminating manual reconciliation errors.
The result is a clear, executive-friendly report of cash movements. For instance, a CFO can log in to NetCash and immediately see today’s cash inflows and outflows instead of waiting for month-end reports. This immediacy transforms how executives can use cash data.
Transition to direct cash flow management with NetCash
The direct cash flow statement is a valuable strategic tool for executive decision-making. By enhancing financial planning, operational oversight, and transparency, direct cash flow analysis enables CFOs and executives to steer their companies with greater confidence.
The indirect method served its purpose when technology was a constraint, but today it represents a missed opportunity for deeper insight.
Modern CFOs should view transitioning to direct cash flow reporting not as extra work, but as unlocking a competitive advantage. NetCash can help with direct cash flow statements and forecasts that are easy to produce and use.
Schedule a personalized demo to explore NetCash’s direct cash flow solution and discover how it can usher in a new era of data-driven, confident decision-making.
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