Direct vs. Indirect: Which to Use?

Chapter 16: Cash is King - Page 16.11

Direct vs. Indirect: Which to Use?

What's most important in cash planning is the forecast of the cash balance. The experts can argue about direct vs. indirect (and theory and fashions DO change), but in the end either method will come to the same cash balance, if properly applied. Choose whichever method seems more natural to you. Some people are comfortable with estimating balances, others prefer to estimate payments made or payments received. For example:

Suppose you prefer to estimate ending balances using simple assumptions. If you wait an average of 60 days (called collection days) to receive money from customers, then your normal end-of-month accounts receivable will be twice the month's sales on credit. That calculation tool and estimator makes the indirect method better.
However, you might prefer to estimate payments received by making the payments received in March equal to sales on credit in January. That calculation favors the direct method.

Ultimately, the choice of method doesn't matter. As long as you're consistent and careful with assumptions, the results should be the same.

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