Cash flow reporting is often taken for granted until profits look strong on paper, but cash in the bank tells a different story. For finance leaders and business owners, this disconnect creates an ongoing challenge: understanding how money actually moves through the organization.
Much of that confusion stems from the reporting method itself. While the direct vs indirect method cash flow debate is common in finance circles, most companies still rely on the indirect approach. Tools like Cash Flow Frog help teams understand what is the indirect method of cash flows without requiring a complete overhaul of their current reporting systems.
Understanding why this method remains dominant requires looking beyond theory and into the realities of finance operations.
Fundamentals of the Statement of Cash Flows
The statement of cash flows tracks actual cash movements and answers essential questions: Where did the cash come from? Where did it go? What does that mean for the business now?
Unlike the income statement, which follows accrual accounting, the cash flow statement organizes cash activities into three categories: operating, investing, and financing.
This structure is especially valuable when leadership wants to understand why strong revenue doesn’t necessarily translate into available funds.
In practice, the cash flow statement becomes a decision-making tool used to evaluate hiring, investments, and debt. When presented clearly, it builds confidence; when opaque, it raises concerns that go beyond the numbers.
The Direct Method: Structure and Appeal
Since it records real cash flow, cash obtained by customers, cash paid to suppliers and employees, the direct method is sometimes considered more natural. It resembles how most people perceive money, is conceptually attractive, and is a typical characteristic of finance courses.
Nevertheless, such clarity has a price. Accrual accounting, rather than real-time cash tracking, is the structure of most accounting systems.
To generate a direct method statement, teams may be required to make manual changes or extract data across several sources or custom systems, tasks that can be cumbersome under tight deadlines.
As a result, despite its simplicity, the direct method remains rare in practice.
The Indirect Method: Structure and Perceived Complexity
The indirect method begins with net income and adjusts for non-cash items such as depreciation, inventory changes, and changes in accounts receivable and accounts payable. This format has the advantage of being practical, as it already matches the format of financial data.
For finance teams, that alignment means fewer process changes. The method provides a clear link between the income statement and balance sheet, making it easier to integrate into monthly and annual workflows.
However, for those outside of finance, this structure can feel less intuitive. The adjustments may seem abstract or disconnected from actual business activity.
Often, the challenge lies not in the method itself, but in how it’s explained. Poorly presented reconciliations can obscure insight.
Tools like Cash Flow Frog help bridge this gap by turning indirect cash flow data into clear, accessible insights, without requiring teams to abandon existing systems.
Regulatory Perspectives and Historical Context
Both U.S. GAAP and IFRS allow companies to use either method, yet the indirect method has become the norm. Due to the growing popularity of accrual accounting, the indirect form became entrenched in audit procedures, computerized financial systems, and internal controls.
The conversion to a different format would currently require retraining of teams, system modification, and revision of audit processes- changes which do not necessarily improve compliance or insights.
It is cash flow, not profitability, that will make the company continue growing. Besides, during times of economic uncertainty, a lack of cash visibility can increase risk.
These perspectives justify the view that it is better to maintain clarity in the existing framework rather than replace it.
Practical Reasons for Widespread Indirect Method Adoption
For many companies, the indirect method simply works better in practice. It integrates smoothly with existing systems and supports efficient reporting.
Here are key reasons companies continue to use the indirect method cash flow format:
- Aligns with accrual-based accounting systems
- Enables faster monthly and annual closing
- Requires less implementation and maintenance effort
- Meets audit and compliance expectations
- Maintains consistency across historical periods
On the one hand, smaller teams avoid the extra workload; on the other, larger organizations may not see many returns from modifying a practice that addresses operational and regulatory requirements.
Rather than changing methods, finance teams are enhancing how they present cash flow data through tools that can predict it, visualize it, and model scenarios.
In conclusion
The continued reliance on the indirect method isn’t resistance to change. It reflects decades of system design, regulatory alignment, and operational practicality.
While the direct vs indirect method discussion remains relevant in theory, real-world finance teams prioritize solutions that work under real constraints.
The opportunity today isn’t to replace the indirect method, but to improve how it’s explained and presented. By making cash flow data more accessible and actionable, businesses can enhance decision-making, strengthen internal confidence, and maintain consistency, all without overhauling what already works.
How does your organization approach cash flow reporting? Share your experience and join the conversation on how finance teams are improving clarity without reinventing their processes.
