Cash is king for any small business. As accountants we understand this intrinsically. Having a relatively smooth and consistent cash inflow and outflow each month is the lifeblood of your operation.
Just because you have proper accounting practices in place doesn’t mean you actually understand where your cash is ending up. This can be a function of accrual accounting, or GAAP based financial reporting, which often show data that may not translate easily into day-in-day out terms.
Add in inventory, and it can get even more complex. It takes money to turn the inventory around, but it is still considered an asset on the balance sheet until it has sold. It can be easy to drain your cash supply assuming you will see it back in sales sooner than reality dictates.
“Just run a report in QuickBooks.”
Yes, we hear what you are thinking. While QuickBooks can do many amazing things, it on its own won’t get to the root of the question: “Where’s my cash?” in a direct fashion.
QuickBooks offers a statement of cash flow, but the way in which the cash flow change is calculated is the indirect cash flow method. It starts from net income, then filters down into cash changes. This is not like the direct method that starts from the actual cash/bank transactions, which are then categorized by type.
So what’s a complex GAAP-based business to do when it needs the down-to-earth cash-based insight?
Our Direct Cash Flow method was developed to solve this problem. It does this by illustrating your categories of spending and income, and presenting it all in a no-BS month-over-month view.
The direct method of cash flow provides clearer insights into how cash moves through a business than the indirect method, making it a powerful tool for small businesses that need to stay on top of their finances. It helps you understand where the money is coming from and where it is being spent.
One of the biggest advantages of the direct method is its transparency. It itemizes actual cash receipts and payments, which offers business owners a clear view of where cash is coming from and where it’s going.
Unlike the indirect method, which starts with net income and adjusts for non-cash items, the direct method presents cash flow in a way that is easier to track and understand, and way less time consuming.
With the direct method, you have a clearer understanding of which parts of your business are generating cash and which are consuming it. For instance, a company could see detailed cash payments to suppliers or receipts from customers, enabling a more informed approach to managing these key relationships.
Knowing these details allows business leaders to make operational decisions, like adjusting payment terms, improving collections, or negotiating better supplier contracts, with more precision.
Cash flow projections are a cornerstone of financial planning, and the direct method provides a better foundation for these projections. By basing projections on actual cash movements, businesses can more easily predict their cash flow based on customer payments and supplier obligations. This is particularly useful for companies that experience seasonal shifts in demand (think an inventory based chocolate company just before the holidays) or a company that operates with tight margins.
It makes budgeting and forecasting more reliable, allowing for smarter planning.
Investors love the direct method for its simplicity and clarity. Understanding how a business is performing in terms of cash generation and spend is one of the key factors that determines what makes a business an attractive–or unattractive–investment.
Cash flow is a key indicator of financial health, and seeing the exact sources and uses of your cash can make a big difference in their assessment of a company's value.
Because the indirect method begins with net income and adjusts for non-cash items, it can sometimes obscure the true picture of a company's cash position. This approach relies on accounting estimates and assumptions, which could potentially introduce biases or inaccuracies into the cash flow statement.
By focusing only on actual cash transactions, the direct method offers a clearer, more accurate view.
Accountfully understands the needs of small businesses, particularly those managing inventory systems that involve large cash outlays and ongoing receivables. By offering the direct method of cash flow analysis, we’re able to provide clients with deeper insights into their finances. This in turn, helps them make better decisions, maintain liquidity, and forecast future cash needs with greater accuracy.
The reason we developed this service is that there is no way to see direct cash flow in QuickBooks.
Of course, the indirect method has its own benefits. It’s simpler to prepare and aligns with a company’s net income statement, making it easier to reconcile reported income with cash flow. But for businesses with complex inventory management or reporting requirements, the level of detail provided by the direct method can be invaluable.
If you're looking for more clarity in your financial reporting, a way to custom-tailor buckets of expenses, and a better way to manage cash flow, Accountfully’s direct method cash flow service might help.
We work with you to tailor the method to your specific business and develop a system that helps you see the categories of spending and income you need to make those strategic decisions moving forward.
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If you are in need of a more clearly-defined view of your operational cash flow, let’s chat! We would love to turn those indirect cash flow statements into an insightful tool to help you navigate your business.
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