Direct Method in Cash Flow: 2026 Updates & Australian Insights

The direct method is a way to prepare the cash flow statement, one of the core financial reports. Unlike the more common indirect method, which starts with net profit and adjusts for non-cash items, the direct method lists actual cash receipts and payments as they happen. That means you see precisely where cash came in and went out—offering a transparent, easy-to-follow picture of cash movement.

• Cash received from customers

• Cash paid to suppliers and employees

• Cash paid for operating expenses

• Cash paid for interest and income taxes

This approach demystifies cash flow, especially for non-accountants. Instead of wading through adjustments and accruals, readers see the actual transactions that affected the bank balance.

Several factors are driving renewed interest in the direct method this year:

• Regulatory updates: The Australian Accounting Standards Board (AASB) has signalled stronger encouragement for transparent reporting, in line with international best practice. While the direct method is not yet mandatory, recent AASB discussion papers suggest it could become a preferred approach for certain listed companies.

• Investor demand: Investors are increasingly focused on cash generation and liquidity, especially after recent market volatility and high-profile insolvencies. The direct method gives them a clearer, timelier view of cash health.

• Technological advances: Cloud accounting platforms now make it easier than ever to extract and report on real cash transactions, removing much of the manual work that once made the direct method cumbersome.

For example, several ASX-listed tech firms have begun publishing both direct and indirect method statements in their 2026 annual reports, aiming to appeal to a broader investor base and stand out for transparency.

Most Australian businesses still use the indirect method, mainly because it’s simpler to prepare from standard accounting records. But the direct method offers key advantages:

• Clarity: Stakeholders see the real cash inflows and outflows, not just accounting adjustments.

• Decision-making: Managers can spot cash shortfalls or surpluses early, improving budgeting and planning.

• Comparability: As more companies adopt the direct method, benchmarking against peers becomes easier.

However, the direct method does require more detailed transaction tracking. Businesses with less sophisticated accounting systems may find the transition challenging, though modern software is closing this gap.

In 2026, some large Australian retailers have piloted the direct method, reporting that it has improved both internal cash management and external investor relations. On the other hand, smaller businesses may still prefer the indirect method for its simplicity, especially if their stakeholders are used to it.

The direct method isn’t just an accounting technicality—it has real consequences for how cash flow is understood and managed. For instance, a construction firm using the direct method was able to identify payment delays from a key client early and take action to shore up liquidity. Meanwhile, a not-for-profit leveraged direct method reporting to demonstrate to donors exactly how funds were being used, boosting donor confidence in a competitive fundraising environment.

Looking ahead, with the AASB’s ongoing consultations and growing investor appetite for transparency, more Australian companies are likely to embrace the direct method in the next few years. While the transition may take time, the benefits for both businesses and their stakeholders are clear.