Cash Flow – Indirect Method

This report does not present cash inflows and outflows directly. Instead, it starts with net profit, then applies a series of adjustments to arrive at the actual net cash flow.

In other words, it explains how accounting profit is converted into real cash within the business, taking into account items that do not represent actual cash movements.
 

What is the difference between the direct and indirect methods?

• Direct method: shows cash inflows and outflows explicitly (such as receipts and payments)
• Indirect method: starts from net profit and adjusts it to calculate cash flow

The indirect method helps you understand:

• Why profit does not always equal cash
• What factors affected liquidity despite generating profit
   

How to access the report in Wafeq

To view the Cash Flow report using the indirect method:

1. Go to "Reports" from the main menu.
2. Under "Financial Reports".
3. Select "Cash Flow – Indirect Method".

How is cash flow calculated using this method?

The report starts with:

1) Net Profit

This is the accounting profit generated from the income statement during the selected period

2) Adding non-cash items

Such as:

• Depreciation
• Any expenses or income that do not involve actual cash movement

These items affect profit but do not represent actual cash received or paid

3) Adjustments for working capital

This includes changes in:

• Accounts receivable
• Accounts payable
• Inventory

These changes explain:

• Whether cash has actually been collected
• Or is still tied up in unpaid transactions

What does the report show?

This report helps you understand:

• Why you may have profit but not enough cash
• How unpaid invoices or delayed payments affect liquidity
• The relationship between accounting performance and actual cash position

Simple example

• Net profit = 100,000
• A large portion of invoices has not yet been collected

In this case:

• Profit is high
• But actual cash is lower

The report highlights this gap by:

• Adjusting for uncollected receivables
• Showing the real impact on cash