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Understand the differences between direct and indirect cash flow

Nowadays, one of the main objectives of entrepreneurs is to ensure the development and sustainability of their company. To do so, many choose to invest in improving their management together with the use of technologies in the corporate environment. In this sense, we should emphasize the role of financial management, as this is one of the main areas responsible for ensuring the business’s stability.

If it is not done strategically, financial imbalance may occur, leading to the stagnation of the business. To avoid this, it is crucial that managers know all the issues related to the financial sector. We can mention the direct and indirect cash flow as one of the items that is essential to a good organization in this department.

If you have no idea about what each concept is, we’ve prepared this article for you. Read on and stay on top of it!

What is direct cash flow?

Direct cash flow is nothing more than the record of all amounts, whether paid or received by the company, which were moved in a given period. With it, it is possible to identify the business’s gross results in a realistic way.

It uses the cash system, which can be said to be the most common one currently. As the main benefit, we can highlight that direct cash flow allows obtaining quickly updated data and information that are very useful for the work of financial managers.

What is indirect cash flow?

Indirect cash flow is based on the net income analysis and measures the impacts on cash flow. Thus, unlike the direct cash flow, it does not provide an input and output view, as in this case it uses an accrual basis.

In practice, the main idea is to study the variation in cash for a given period from an accounting point of view. That way, it is possible to distinguish the actual cash from the balance of the financial statements.

What is the best option for the company?

As for the definition of which method to use in your company, it is worth mentioning that one should not necessarily exclude the other. In fact, the two complement each other to generate pertinent information about the control of your business’ finances.

By using them, managers are able to better understand factors such as revenue, net and gross income, costs and expenses, and several other topics related to the finance department.

It is worth noting that if your intention is to obtain greater control and clarity over these processes, in addition to using these methodologies, it is essential to count on the help of a management system. With this feature, you are able to centralize data and information about the company’s sectors, as well as manage the sales operations and expenses of the institution.

So, these were the main information about the difference between direct and indirect cash flow. Being aware of topics like this contributes a lot to optimizing the work of financial management, in addition to making a greater control over these processes possible.

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