Indirect Method for Cash Flow: Australian Guide 2026

The indirect method is a widely used approach for preparing cash flow statements. Instead of listing every cash transaction, it starts with net profit (from your income statement) and adjusts for non-cash items and changes in working capital. This method helps bridge the gap between your business’s reported profits and its actual cash position.

Key steps in the indirect method:

• Start with net profit: Use the net profit figure from your income statement as the starting point.
• Add back non-cash expenses: Expenses like depreciation and amortisation are added back, since they reduce profit but do not involve cash outflows.
• Adjust for working capital changes: Changes in accounts receivable, inventory, and payables are factored in to reflect the actual movement of cash.

This approach is common among Australian businesses, especially those following AASB 107 standards. It is valued for its clarity and efficiency, making it suitable for a wide range of organisations.

In 2026, Australian businesses are operating in an environment that emphasises transparency and accuracy in financial reporting. The indirect method is particularly useful in this context for several reasons:

• Alignment with regulations: The indirect method remains a standard approach under Australian accounting guidelines, especially for entities not required to use the direct method.
• Integration with technology: Modern accounting software can automate much of the reconciliation process, reducing manual errors and saving time.
• Audit and compliance benefits: Auditors often prefer the indirect method because it clearly shows how net profit is reconciled to cash flow, making it easier to verify the accuracy of financial statements.

As digital reporting and sustainability disclosures become more common, the indirect method provides a practical way to present cash flow information that meets the needs of regulators, lenders, and investors.

Here is a step-by-step guide to preparing a cash flow statement using the indirect method, tailored for Australian businesses:

1. Start with Net Profit

Begin with the net profit figure from your income statement. This figure reflects your business’s earnings after all expenses, including non-cash items.

2. Add Back Non-Cash Expenses

Certain expenses reduce your profit but do not involve actual cash outflows. Common examples include:

• Depreciation
• Amortisation
• Provisions for doubtful debts

Add these amounts back to your net profit.

3. Adjust for Changes in Working Capital

Working capital refers to the difference between your current assets and current liabilities. Changes in these accounts can affect your cash position:

• Increase in accounts receivable: Subtract from cash flow, as this represents sales made on credit but not yet collected.
• Increase in accounts payable: Add to cash flow, since this means you have delayed payments to suppliers, preserving cash.
• Increase in inventory: Subtract from cash flow, as purchasing more inventory uses cash.

4. Remove Non-Operating Items

Exclude gains or losses from the sale of assets and other non-operating items, as these are not part of regular business operations.

5. Calculate Net Cash from Operating Activities

After making all adjustments, the resulting figure represents the net cash generated or used by your business’s core operations.

Example Structure

A simplified indirect method cash flow statement might look like this:

Net profit before tax
+ Depreciation and amortisation
+/- Changes in accounts receivable
+/- Changes in accounts payable
+/- Changes in inventory
+/- Other adjustments
= Net cash from operating activities

Most accounting software can generate this statement automatically, but understanding each step helps you spot issues and explain your numbers to stakeholders.

The indirect method is more than just a compliance requirement—it’s a valuable tool for managing your business. In 2026, several trends are making this method even more relevant:

Digital Transformation

Cloud-based accounting platforms are streamlining the preparation of cash flow statements. Automated reconciliation reduces the risk of manual errors and allows finance teams to focus on analysis rather than data entry.

Lending and Investment

Banks and investors often review cash flow statements prepared using the indirect method to assess a business’s liquidity and operational health. Clear reconciliation between profit and cash flow can help build trust and support funding applications.

Tax and Compliance

Accurate cash flow reporting is important for meeting Australian Taxation Office (ATO) requirements. Consistency between your cash flow statement and other financial reports can help avoid compliance issues.

Sustainability and ESG Reporting

As environmental, social, and governance (ESG) considerations become more prominent, some lenders and investors are looking for cash-based metrics. The indirect method provides a clear view of how operational activities translate into cash, which can be useful for sustainability-linked reporting.

• Stay updated: Accounting standards and reporting requirements can change. Regularly review guidance from the Australian Accounting Standards Board (AASB) to ensure your reporting remains compliant.
• Leverage technology: Make use of accounting software to automate calculations and reduce the risk of errors.
• Understand your numbers: Even with automation, it’s important to understand how adjustments affect your cash flow. This knowledge can help you identify trends, manage liquidity, and communicate effectively with stakeholders.
• Prepare for scrutiny: As reporting becomes more transparent, expect greater attention from auditors, lenders, and investors. Clear, accurate cash flow statements can support your business’s reputation and access to funding.

The indirect method for cash flow statements remains a practical and widely accepted approach for Australian businesses in 2026. By starting with net profit and making clear adjustments for non-cash items and working capital changes, you can present a transparent view of your business’s cash position. Embracing this method—supported by modern accounting tools—can help you meet regulatory requirements, satisfy stakeholders, and make informed decisions for the future.

For more on understanding your business’s financial health, see our guide to insurance brokers.