Financial Glossary
Indirect Method (Cash Flow)
The indirect method is a way of preparing the operating activities section of the cash flow statement. It starts with net income, then adds back non-cash expenses such as depreciation and amortization and adjusts for changes in working-capital accounts like receivables, payables, and inventory. The result reconciles accrual-based profit to the actual cash generated by operations.
Problem & Application
Most small businesses use the indirect method because it draws directly from the income statement and balance sheet you already maintain, rather than tracking every cash receipt and disbursement. For an owner-operated business, it explains the gap between a profitable P&L and a tight bank balance, since money can be tied up in unpaid invoices or seasonal inventory. Seeing those working-capital swings is often the first step in fixing a cash crunch.
In Short
The indirect method turns reported profit into a clear picture of operating cash, making it the practical default for small-business cash flow statements.