4.1·7 min read

The Indirect Method (Operating Cash)

Start at net income, add back non-cash charges, then adjust for working-capital changes to reach cash from operations.

By the end you can

✓Build cash from operations the indirect way
✓Get the sign of each working-capital change right

Almost every real company uses the indirect method: it starts at (already on hand from the ) and reconciles it to operating cash.

\text{CFO} = \text{Net Income} + \text{D\&A} - \Delta\text{Working Capital}

Add back non-cash D&A; subtract the increase in net working capital.

Signs that trip everyone up

An increase in an asset (receivables, ) uses cash, so it is subtracted. An increase in a liability (payables) provides cash, so it is added. Assets up = cash down; liabilities up = cash up.

Worked example · CFO from net income

Given

• 120, 40, up 25, up 10, up 15

Solution

1.Working-capital change (net use)
$25 + 10 - 15 = 20$
2.
$120 + 40 - 20 = 140$

Answer

= 140. The receivable and builds consumed cash; the payable increase gave some back.

Check yourself

Accounts receivable increases during the year. On the indirect cash flow statement this is:

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Working Capital & Roll-Forwards

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Investing, Financing & Tying to Cash