Indirect Method for Cash Flow: Australian Guide 2025

Cash flow statements are the backbone of business finance, revealing the true health of an organisation beyond the surface of profit and loss. In 2025, as Australia sharpens its focus on transparent corporate reporting, the indirect method for preparing cash flow statements is coming into sharper focus—especially for small and mid-sized enterprises. If you’re a finance manager, business owner, or startup founder, understanding the indirect method isn’t just about compliance; it’s about unlocking clearer insights into your business’s operations.

What is the Indirect Method? Demystifying the Basics

The indirect method is a way of preparing the cash flow statement where you start with net profit (from your income statement) and adjust for non-cash transactions and changes in working capital. Unlike the direct method, which lists actual cash receipts and payments, the indirect method reconciles accrual accounting figures to actual cash movements.

• Starts with net profit: The process begins with your business’s net income.
• Adds back non-cash expenses: Items like depreciation and amortisation are added back, as they reduce profit but not cash.
• Adjusts for changes in working capital: Changes in accounts receivable, inventory, and payables are factored in to reflect real cash flow.

This method is the default for many Australian companies, especially those following AASB 107 standards, and is increasingly recommended by the Australian Accounting Standards Board (AASB) for its efficiency and simplicity.

2025 Reporting Trends: Why the Indirect Method Matters More Than Ever

With Australia’s 2025 corporate reporting reforms, including enhanced digital lodgement requirements and sustainability-linked disclosures, the indirect method is becoming even more attractive for busy finance teams. Here’s why:

• Regulatory Alignment: The AASB continues to support the indirect method, especially for entities not required to report using the direct method under international standards.
• Technology Integration: Cloud accounting platforms like Xero and MYOB now automate much of the reconciliation process, making the indirect method faster and more accurate.
• Audit Readiness: Auditors appreciate the transparency in adjustments from net profit to cash flow, reducing the risk of misstatements or compliance breaches.

For example, in 2025, a Sydney-based manufacturing SME adopted the indirect method via their MYOB dashboard. By automating depreciation and inventory adjustments, they cut their quarterly reporting time by 30% and improved communication with investors who prefer seeing cash flow reconciled to profit.

Step-by-Step: How to Prepare an Indirect Method Cash Flow Statement

Ready to dive in? Here’s a practical guide to preparing a cash flow statement using the indirect method, tailored for Australian businesses:

1. Start with Net Profit: Use your income statement’s net profit figure as the base.
2. Add Back Non-Cash Expenses: Include depreciation, amortisation, and any provisions for doubtful debts.
3. Adjust for Working Capital Movements:
   • Increase in accounts receivable = subtract from cash flow
   • Increase in accounts payable = add to cash flow
   • Increase in inventory = subtract from cash flow
4. Include Other Non-Operating Items: Remove gains/losses from asset sales and non-operating items.
5. Reconcile to Net Cash from Operating Activities: The sum of these adjustments gives you the net cash from operating activities.

Modern accounting systems can generate these statements with a few clicks, but understanding the process helps identify red flags and opportunities for optimisation.

Indirect Method in Practice: Real-World Applications and 2025 Considerations

The indirect method isn’t just an accounting formality—it’s a tool for business strategy. In 2025, with tighter lending standards and increased investor scrutiny, banks and venture capital firms in Australia increasingly request indirect method cash flow statements to assess liquidity and operational health.

For example, a Melbourne tech startup seeking Series A funding in early 2025 found their investors were more interested in the reconciliation between reported profits and cash flow than headline revenue figures. By clearly explaining working capital movements, the founders built greater trust and sped up their due diligence process.

Key points for 2025:

• Digital transformation: Automated reconciliation tools are making the indirect method less error-prone.
• Tax and compliance: The ATO increasingly cross-checks cash flow statements with tax lodgements; accuracy is paramount.
• ESG reporting: Many sustainability-linked loans require clear, cash-based metrics—often derived from indirect method statements.