Direct vs indirect cash flow forecasting

The direct method

The direct method is exactly what it sounds like: you list every expected cash receipt and every expected cash payment, by date, and net them off. Customer receipt on the 15th, wages on the 28th, VAT on the 7th. It is intuitive, precise on timing, and ideal for short horizons like a 13-week forecast. Its weakness is effort — for a longer horizon, listing every line becomes unwieldy.

The indirect method

The indirect method starts from projected profit and adjusts it back to cash: add back non-cash costs like depreciation, then adjust for changes in working capital — money tied up in extra stock or debtors, money freed by stretching creditors. It is how the statutory cash flow statement is usually built, and it suits longer, higher-level planning where line-by-line detail is impractical.

Which to use when

Use the direct method for anything inside a quarter, where the question is "can I pay the bills as they fall due?" Use the indirect method for annual and multi-year planning, where the question is "does the business model generate cash over time?" Many finance teams run both: a rolling 13-week direct forecast for control, and an indirect annual projection for strategy.

The bridge between them

The two methods should reconcile. If your indirect forecast says the year generates £120k of cash but your rolling direct forecast keeps dipping negative, the difference is timing — the cash is real but arrives unevenly. That gap is precisely where short-term working-capital finance earns its keep, smoothing a profitable but lumpy cash profile.

Getting help to fund the gap

Where the direct forecast shows a genuine trough the business will trade through, a short facility bridges it.

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