Calculating cash flow: the direct and the indirect method with one example

The quarter closed with 24,000 euros in profit. The accountant is satisfied, the figures add up. And yet there is 21,000 euros less in the bank than three months ago.

Anyone who experiences this for the first time thinks something is wrong with the bookkeeping. Usually nothing is wrong: profit and money are two different things, and the cash flow calculation is the bridge between them. In this article we work through the same quarter using both the direct and the indirect method, so you can see where the money went and why you actually want to see both methods.

What cash flow really is

Cash flow is the difference between the money that comes in and the money that goes out over a period: the closing balance in the bank minus the opening balance. Precisely because it is so simple, it is an honest figure. You cannot shift it around the way you can with a provision or a depreciation period.

In a cash flow statement you split that cash flow into three parts:

• Operating cash flow: the money from your ordinary business operations. Customers who pay, suppliers and staff whom you pay.
• Investing cash flow: what you spend on fixed assets, or receive when you sell them.
• Financing cash flow: what moves to and from the bank and the shareholders, such as loans, repayments and dividends.

The first is the most important, because it tells you whether the business generates money on its own.

The direct method: what comes in and what goes out

The direct method adds up the actual payments, by type. You look at the bank transactions and sort them: received from customers, paid to suppliers, wages, taxes and other costs. For our quarter, fictional figures:

The direct method shows where the money goes. Useful if you want to know how much goes to suppliers each month, or what the taxes cost you in cash. What it does not show is why it sits so far from the profit.

The indirect method: from profit to money

The indirect method starts with the result and corrects step by step for everything that is in the profit but is not money, and the other way around. Depreciation is a cost without a payment, so you add it back. An increase in your accounts receivable is revenue that has not yet been paid, so you take it off. The same quarter:

Same outcome, different story. Now you can see where the 45,000 euro difference between profit and bank balance sits:

• 14,500 is with customers who still have to pay;
• 4,000 is sitting in the warehouse;
• 5,000 was paid to suppliers faster than last quarter;
• 20,000 is in the new delivery van;
• 7,500 went to the bank as a repayment.

Only the 6,000 in depreciation works the other way: those were costs that did not cost any money.

Why you want to see both methods

The direct method is the method of the bank account: where the money went. The indirect is the method of the balance sheet: why it differs from the profit. If you want to know whether you can keep paying your suppliers, look at the direct method. If you want to know whether the business structurally generates money or whether the profit is tied up in working capital, look at the indirect method.

There is one more reason to calculate both, and you rarely hear it: they should arrive at the same number. The movement on your bank accounts is the net cash flow; both methods simply calculate it by a different route. If they do not match, there is an account outside the breakdown, such as a suspense account or a clearing account that has not been assigned to any of the three cash flows. The difference is therefore not a calculation error but a control figure.

From Exact Online, AFAS or Twinfield, per month

Drawing up a cash flow statement by hand is a quarterly job, and even then only according to one method. Yet all the figures are already in your administration: the bank movements for the direct method, the balance sheet movements and the result for the indirect method.

The liquidity dashboard calculates the cash flow per month using both methods, adds the difference between them and shows in a waterfall how you get from the opening balance to the closing balance. The breakdown is based on the type of the general ledger account, not on the number, so you do not have to set anything up in advance. The dashboard runs in Claude, connected via Exact AI Connect or the variant for AFAS and Twinfield.

The dashboard itself makes one note too: the current month is only complete once the bank has been updated. You can read why up-to-date bank data is the basis for this in our article on real-time cash flow insight.

If you want to know whether the month is truly closed before you look at the overview, the checklist for your month-end close checks whether the bank, the suspense accounts and the period entries match up. All overviews can be found at the financial dashboards.

We think the indirect method is the underrated of the two. The direct one tells you what happened, the indirect one tells you why, and that is something you can act on.

Work it out for yourself. Start 30 days free →

Try these questions in your own AI assistant

• "Create a cash flow statement for the past quarter using the direct and the indirect method, and show the difference."
• "Why did my bank balance drop this quarter even though I made a profit?"
• "How much went to suppliers, wages and taxes per month over the past six months?"
• "What is my operating cash flow per month this year, alongside last year?"

Benefits and points of attention

Benefits of both methods side by side: you see both where the money went and why it differs from the profit, and the difference between the two is a built-in check on your accounts.

Points of attention: the current month is incomplete as long as the bank has not been updated, so compare closed months where possible. An account that falls outside the standard layout appears as a separate line, so take a moment to see what is on it. And the dashboard requires the Analytics subscription plus a paid Claude subscription.