Indirect method
A method of preparing the cash flow statement starting from net result, adjusted for non-cash items such as depreciation and movements in working capital.
What does indirect method mean?
A method of preparing the cash flow statement starting from net result, adjusted for non-cash items such as depreciation and movements in working capital.
This method starts from the result and adjusts for items without cash effect and changes in working capital. An increase in receivables, for example, lowers the operating cash flow. The final cash movement must reconcile to cash and cash equivalents.
How does it work?
RJ 360 allows two methods for the cash flow from operating activities. With the indirect method you start from the result and make three kinds of adjustments: items that are not cash flows (depreciation, impairments, additions to provisions), movements in inventories, receivables, payables and accruals, and items that belong to investing or financing, such as the book profit on a sold machine.
The signs follow one rule: an increase in an asset item costs money and is deducted, an increase in a liability yields money and is added. The three cash flows together equal the movement in cash on the balance sheet.
Example
A printing company (BV) closes 2026 with an operating result of € 40.000. Depreciation: € 18.000 added. Addition to the warranty provision: € 3.000 added. Receivables rose from € 52.000 to € 61.000: € 9.000 deducted. Inventory fell from € 30.000 to € 26.000: € 4.000 added. Payables fell from € 24.000 to € 19.000: € 5.000 deducted. Cash flow from operations: 40.000 + 18.000 + 3.000 − 9.000 + 4.000 − 5.000 = € 51.000. After € 7.000 of corporate income tax paid, the operating cash flow is € 44.000. The interest paid of € 2.000 the printing company shows under financing activities.
In the annual accounts
Cash flow statement, if prepared; not an item on the balance sheet or P&L.
Difference from the direct method
The direct method shows the cash flows themselves: received from customers, paid to suppliers and employees. The indirect method requires no separate recording of receipts and payments: it follows from the balance sheet and profit and loss account and shows why profit and cash diverge.
Common mistakes
- Deducting depreciation instead of adding it
- Processing balance sheet movements with the wrong sign
What to watch for
- Adjust the balance sheet movements for what is not an operating cash flow: a written-off receivable, or a machine not yet paid for within payables.
- Show interest paid, dividend received and profit tax paid as separate lines.
- The statement is mandatory only for medium-sized and large entities; see do I have to prepare a cash flow statement.
Legal basis and source
RJ 360
Frequently asked questions
Why do I add depreciation to the profit?
Because depreciation reduces profit without money leaving the company in the financial year. The money was spent at the purchase; that expenditure appears under the investing cash flow.
What do I do with the book profit on a sold car?
You take the book profit out of the operating cash flow and show the entire sale proceeds under investing activities.
Which result does the calculation start from?
Preferably from the operating result. Up to and including financial year 2026, the result before or after tax is also allowed. For reporting years from 1 January 2027, the starting point aligns with a subtotal from the profit and loss account under the Decree on annual accounts formats.
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Preparing Dutch annual accounts?
Your first set of annual accounts is free, for every size class. Create an account and prepare the annual accounts of your Dutch company under Title 9 of Book 2 of the Dutch Civil Code.
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