There is an ongoing debate between the two primary methods to calculate your cashflow when preparing your finances. For small businesses, you might choose to report your cashflow using either the direct or indirect reporting method. However, you can get very different results depending on which method you use, which will influence how you strategize your finances and the apparent strategies available to improve the cash flow for your small business.
What is the difference between direct and indirect cashflow reporting? Is direct or indirect cashflow better for small business management? Here is everything you need to know.
What is Direct Cash Flow Reporting?
Direct cash flow reporting is straight-forward, transaction by transaction accounting. You will first add up all the sources of income. Each transaction that increases your cash reserve will add to the income column. Then you will remove expenditures. Every transaction that removes cash from your business account goes into the expense column.
Transactions are separated by time period, usually by quarter or by year. You can closely measure exactly how much you have earned and how much you have spent using the direct cashflow method.
Pros and Cons of Direct Cash Flow Reporting
Direct cashflow reporting is extremely practical for small businesses. It gives you a clear view of exactly how much is being earned and spent each quarter or year, giving you a solid baseline for improving your cashflow from that point. Direct cashflow reporting also provides great data for detailed analytics.
However, direct cashflow becomes less practical the more transactions your business handles in a short period of time. Once you are handling thousands of transactions per month, direct cashflow reporting may become resource-heavy by hand.
What Is Indirect Cash Flow Reporting?
Indirect cashflow reporting uses a combination of other financial reports to get an estimate of changes in your company’s cash value. Calculating indirect cash flow starts with your net income, looking at how much your company has made over the specified time period. From there, you take other financial reports to indicate whether you should add or subtract.
Indirect cashflow reporting also includes things like whether your assets have grown or shrunk in value due to depreciation, interest, or changes in the stock market, as well as straight income vs expense transactions. This may include financial statements from accounts receivable and accounts payable, and changes in short-term assets or liability accounts as well.
Pros and Cons of Indirect Cash Flow Reporting
Indirect cashflow reporting is considered industry standard. It is preferable for large businesses that handle too many individual transactions to calculate each of them through direct reporting, but it is also the standard for IFRS, and so any publicly traded businesses that prefer direct cashflow calculations will also need to prepare an indirect cashflow report.
Indirect cashflow reporting is widely used. However, it is also much less precise than direct cash flow reporting. Indirect reporting encompasses non-cash changes in the company’s value, while direct cash flow specifically calculates your income to expenses.
How to Improve Your Small Business Cash Flow
There are many ways to improve the cash flow of your small business, depending on where there is room to tighten your margins. Often, you will be able to find opportunities to reduce waste or save on expenses simply by looking more closely at how your business is spending. Tracking software is useful across the board, from cashflow analytics to time tracking.
Track Your Expenses to Optimize Spending
The first place to look is your expense report. You will often find areas in your business spending that could be more efficient. You may be able to reorder supplies in larger quantities less often to improve shipping costs, cut back on things that are rarely needed, or identify your most costly expenditures and look for a better deal.
Tracking your expenses can also reveal spikes where unplanned spending may be taking place that should be stopped or better strategized.
Make Deals with Vendors
Often, businesses can get better prices on their supplies or stock by making deals with vendors. Setting up a vendor contract rather than sending in periodic orders is a great place to start. If you already have a vendor contract, ask to renegotiate for a better value. Remember that improving your cash flow with vendors typically involves seeking a win-win deal where your vendors also receive something of value in return, whether that is more steady orders, exclusivity, or something specific to your industry that benefits them.
Optimize Workflows to Reduce Waste
Identifying waste in your workflow can also help improve your cashflow. Any place where supplies are being overused or where stock is being thrown away is an opportunity to find savings. Reducing waste also comes with the added bonus of getting closer to your sustainability goals.
Time Tracking to Improve Efficiency
Time tracking can help you examine the efficiency of each team. You may identify where time is being lost or where tasks are taking longer than they need to. Perhaps one team is overstaffed, and another is understaffed, so that you can save on wages and overtime by balancing the two.
Track Employee Time to Optimize Payroll
Lastly, you can look for opportunities to streamline your payroll. Good time tracking software can help you ensure that everyone is being paid for exactly the hours they work. You can reduce unnecessary overtime, buddy-punching, and other payroll inflating issues with accurate tracking.
Improve Your Cashflow with Time Tracker
Time Tracker by eBillity offers an accessible and accurate employee time and billing app. If you are looking for ways to improve cashflow for your small business, Time Tracker can help you streamline payroll for both accurate pay and reduced costs. Try Time Tracker free for 14-days and see how you can improve your businesses cash flow.