{"id":17651,"date":"2026-04-14T07:58:34","date_gmt":"2026-04-14T07:58:34","guid":{"rendered":"https:\/\/nova-praxis.com\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\/"},"modified":"2026-07-28T15:24:20","modified_gmt":"2026-07-28T15:24:20","slug":"direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting","status":"publish","type":"post","link":"https:\/\/nova-praxis.com\/en\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\/","title":{"rendered":"Direct Cash Flow Method: How to Apply It in Cash Flow Forecasting"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><strong>Table of Contents<\/strong><\/p>\n\n<ul class=\"wp-block-list\">\n<li><strong><a href=\"#1\" type=\"internal\" id=\"#1\">What Is the Direct Cash Flow Method?<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#2\" type=\"internal\" id=\"#2\">Why the Direct Method Is Key to Cash Flow Forecasting<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#3\" type=\"internal\" id=\"#3\">Direct method and indirect method: they do not compete; they serve different purposes<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#4\" type=\"internal\" id=\"#4\">When Is It Best to Use the Direct Method?<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#5\" type=\"internal\" id=\"#5\">How to Prepare a Cash Flow Forecast Using the Direct Method<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#6\" type=\"internal\" id=\"#6\">What Information Is Needed for a Good Cash Flow Forecast?<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#7\" type=\"internal\" id=\"#7\">Practical Example of Cash Flow Using the Direct Method<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#8\" type=\"internal\" id=\"#8\">What time horizon should be used?<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#9\" type=\"internal\" id=\"#9\">How to Transition from a One-Time Model to a Recurring Process<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#10\" type=\"internal\" id=\"#10\">Common Mistakes When Applying the Direct Method<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#11\" type=\"internal\" id=\"#11\">How to Use Cash Flow Forecasting to Make Better Decisions<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#12\" type=\"internal\" id=\"#12\">The direct method as a management tool, not just a calculation tool<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#13\" type=\"internal\" id=\"#13\">FAQ on the Direct Cash Forecasting Method<\/a><\/strong><\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">Having sales, profit margins, and even an annual budget does not guarantee day-to-day financial health. Many companies operate seemingly normally until the problem that no one wants to face comes to light: a lack of liquid resources to cover immediate payments, finance working capital, or bridge the gap between collections and obligations. When that happens, profitability is no longer the main issue. The question becomes a much simpler\u2014and more uncomfortable\u2014one:     <strong>Is there enough cash on hand to support operations? Will there be enough in 3\u20136 months? How can we anticipate liquidity needs? And conversely, how can we optimize excess cash?   <\/strong><\/p>\n\n<p class=\"wp-block-paragraph\">That\u2019s where the <strong>direct method<\/strong> takes on special significance. Unlike other approaches that are more focused on accounting analysis or financial reporting, this model focuses on what actually comes in and goes out of the cash flow\u2014that is, on operational reality. And that makes it a very useful tool for building a sound <strong>cash flow forecast<\/strong>, identifying potential <strong>cash flow constraints<\/strong>, and improving decision-making capabilities.   <\/p>\n\n<p class=\"wp-block-paragraph\">As part of a broader financial management strategy, this approach can be supplemented with a<a href=\"https:\/\/nova-praxis.com\/prevision-caja-medio-plazo\/\"> medium-term cash flow forecast<\/a> to gain perspective and plan further in advance.<\/p>\n\n<p class=\"wp-block-paragraph\">When applied correctly, the direct method allows you to transform a vague view of liquidity into a practical system for anticipating collections, scheduling payments, reviewing assumptions, and making decisions more quickly. It\u2019s not about making an Excel spreadsheet look fancier or complicating reporting with more detail than necessary. It\u2019s about having a useful, actionable <strong>cash flow forecast<\/strong> that\u2019s connected to the company\u2019s actual operations.  <\/p>\n\n<p class=\"wp-block-paragraph\">In this article, we\u2019ll explore what the direct cash flow method is, how it differs from the indirect approach, when it\u2019s appropriate to use it, how to build a robust model, and how to turn it into an <strong>operational cash forecast<\/strong> that can support real-world treasury decisions.<\/p>\n\n<h2 class=\"wp-block-heading\" id=\"1\"><strong>What Is the Direct Cash Flow Method?<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">The direct method is a way to analyze and forecast cash flow based on <strong>expected receipts and payments<\/strong>. Instead of starting with the accounting profit and adjusting it\u2014as is done in other approaches\u2014this method directly examines actual cash movements: how much comes in, how much goes out, and when. <\/p>\n\n<p class=\"wp-block-paragraph\">Simply put, the model is usually based on a very clear logic:<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Opening balance + expected receipts &#8211; expected payments = closing balance<\/strong><\/p>\n\n<p class=\"wp-block-paragraph\">It seems basic, and in fact it is. Its value lies not in its mathematical complexity, but in the quality of the information it incorporates and the utility it offers for decision-making. A good cash flow forecast using the direct method helps answer very specific questions:  <\/p>\n\n<ul class=\"wp-block-list\">\n<li>Will there be enough liquidity over the next few weeks?<\/li>\n\n\n\n<li>On what date might a voltage occur?<\/li>\n\n\n\n<li>Which payments can be made as usual, and which ones should be rescheduled?<\/li>\n\n\n\n<li>Is it necessary to secure financing or use lines of credit?<\/li>\n\n\n\n<li>Are there cash flow peaks that allow for the optimization of surpluses?<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">That is why the direct method is particularly well-suited to <strong>cash flow forecasting<\/strong>, where the key is not only to understand why cash flows change, but also to accurately anticipate when there may be a shortage or surplus of liquidity.<\/p>\n\n<h2 class=\"wp-block-heading\" id=\"2\"><strong>Why the Direct Method Is Key to Cash Flow Forecasting  <\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">When a company needs real insight into its liquidity, the direct method is particularly useful because it brings cash flow down to the operational level. It does not rely on an aggregated snapshot or a subsequent financial explanation. Instead, it uses a timeline, due dates, and actual or expected cash flows, as well as forecasts for sales, costs, and investments.  <\/p>\n\n<p class=\"wp-block-paragraph\">This makes it possible <strong>to<\/strong> develop a much more action-oriented <strong>cash flow forecast<\/strong>. For example, if the company knows that over the next six weeks there will be a gap between customer collections and payments to suppliers, it can take action in advance: review terms, prioritize expenses, adjust purchases, secure additional financing, or expedite collections. There\u2019s no need to wait until the problem shows up in the bank account to react.  <\/p>\n\n<p class=\"wp-block-paragraph\">Furthermore, the direct method provides something that\u2019s worth its weight in gold in cash management: time-based visibility. Knowing that there will be pressure \u201cduring the quarter\u201d isn\u2019t very helpful. Knowing that the shortfall will occur in week 3 or week 5 completely changes your room to maneuver. That\u2019s why this approach is so powerful when working with a <strong>weekly cash flow forecast<\/strong> or a <strong>rolling cash flow forecast<\/strong>.   <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"3\"><strong>Direct method and indirect method: they do not compete; they serve different purposes<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">It is common to see comparisons between the direct method and the indirect method, as if one were meant to replace the other. In reality, the two can coexist perfectly well. The problem arises when the indirect method is expected to provide operational utility that it is not designed to offer.  <\/p>\n\n<p class=\"wp-block-paragraph\">The indirect method starts with the net income and adjusts it for non-cash items and changes in working capital to explain changes in cash. It is very useful for linking profitability, the balance sheet, and cash flow. It is used for analysis, planning, and gaining a comprehensive view of the business.  <\/p>\n\n<p class=\"wp-block-paragraph\">The direct method, on the other hand, operates on a different level. It is better suited to questions of actual cash flow: <\/p>\n\n<ul class=\"wp-block-list\">\n<li>What payments are coming in;<\/li>\n\n\n\n<li>What payments are coming up;<\/li>\n\n\n\n<li>When each move will take place;<\/li>\n\n\n\n<li>What balance will remain available after each period?<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">Therefore, when the goal is <strong>to<\/strong> build a <strong>cash flow forecast<\/strong> designed to anticipate liquidity, the direct method tends to be more practical. It does not replace the broader financial perspective; rather, it complements it with a layer that is much more useful for the short term and for daily or weekly management.  <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"4\"><strong>When Is It Best to Use the Direct Method?<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">Not all companies need the same level of detail or the same update frequency. But there are certain situations where the direct method makes a clear difference. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Companies at Risk of Cash Flow Strains<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">If there is a possibility that liquidity could tighten at certain times, the company needs visibility. Not an explanation after the fact, but an actionable forecast. The direct method helps identify these <strong>cash flow pressures<\/strong> before they become an operational problem.  <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Businesses with High Working Capital Pressure<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">When payment terms are long, payments are frequent, or working capital is easily strained, it is particularly useful to work with a <strong>cash flow forecast<\/strong> based on specific receipts and payments.<\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Fast-Growing Companies<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">Growth sounds great until it starts eating into cash flow. Higher sales can mean a greater need for inventory, higher operating expenses, longer collection cycles, and increased financing requirements. In these cases, a good <strong>cash flow forecast<\/strong> helps sustain growth while maintaining better control.  <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Tight margins or sensitive financing<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">When the margin for error is small, every treasury decision carries greater weight. The same is true if the company relies on lines of credit, factoring, insurance policies, or short-term financing decisions. In this context, the direct method becomes a management tool, not just a reporting tool.  <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"5\"><strong>How to Prepare a Cash Flow Forecast Using the Direct Method<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">A useful model doesn&#8217;t come from adding endless rows. It comes from clearly defining the structure, identifying which variables truly drive the business, and assigning clear responsibilities. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>1. Determine the opening balance<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">It all starts with the available balance at the beginning of the period. You can break it down by company, by entity, by country, or even by bank account, depending on the level of detail that makes sense for the organization. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>2. Estimate projected collections<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">This section covers committed or probable collections: outstanding customer invoices, sales forecasts, estimated collection dates, and actual collection performance. The quality of this section is critical. If the estimated timeframes do not reflect reality, the forecast loses its value very quickly.  <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>3. Project expected payments<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">This section typically includes payments to suppliers, payroll, Social Security, taxes, financial debt, rent, utilities, significant CAPEX, and any other outflows with a material impact on cash flow.<\/p>\n\n<h3 class=\"wp-block-heading\"><strong>4. Calculate the ending balance for the period<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">The closing balance for a week or a month becomes the opening balance for the next period. This logic ensures continuity in the model and makes it very easy to visually identify when a potential strain arises. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>5. Choose the right level of detail<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">One of the most common mistakes is trying to model everything at the same level of granularity. You don\u2019t need to forecast every transaction with pinpoint accuracy to have a good <strong>liquidity forecast<\/strong>. You need to rigorously model what actually drives cash flow. As a business grows and becomes more complex, it\u2019s common for cash flow to be spread across multiple bank accounts and various currencies, and the right level of granularity allows you to capture this important level of detail.     <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>6. Define the model and the technology that supports it<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">The first step is usually to rely on a fragmented process spread across different systems, starting with the ERP, and bridging each step using spreadsheets that require a great deal of manual, repetitive, and error-prone work.<\/p>\n\n<p class=\"wp-block-paragraph\">In a digital transformation process, building a short- and medium-term cash flow forecasting model requires access to information from multiple sources (invoicing, purchases, bank balances, payroll, taxes, etc.) which are generally distributed across various systems and databases (ERP, cash management tools, payroll systems, etc.), as well as having a budgeting model in place.<\/p>\n\n<p class=\"wp-block-paragraph\">There are very comprehensive treasury management systems (TMS) available on the market, such as Kyriba, FIS, and Sage XRT. They are excellent for aggregating bank balances, reconciling them with accounting transactions, and providing short-term budgeting capabilities.   <\/p>\n\n<p class=\"wp-block-paragraph\">However, their ability to forecast medium- and long-term cash flows is limited. For this reason, large companies rely on EPM systems\u2014such as Oracle, OneStream, or Jedox\u2014to model these forecasts, which are also integrated with the data sources and budget models already implemented in the EPM system and perfectly complement TMS. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>7. How AI Helps<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">Maintaining a cash flow forecasting model requires repetitive data integration processes\u2014typically on a weekly basis\u2014that can be automated by AI agents.<\/p>\n\n<p class=\"wp-block-paragraph\">On the other hand, predictive algorithms are very useful for forecasting; for example, to adjust collection periods based on historical data beyond the DSOs agreed upon with each customer.<\/p>\n\n<p class=\"wp-block-paragraph\">EPM tools already come equipped with these features natively, ready to be configured and applied to our cash flow forecasting model.<\/p>\n\n<h2 class=\"wp-block-heading\" id=\"6\"><strong>What Information Is Needed for a Good Cash Flow Forecast?<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">The success of the direct method depends less on the tool and more on the quality of the data. That is why it is important to determine which areas should provide information and which variables are truly key. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Charges<\/strong><\/h3>\n\n<ul class=\"wp-block-list\">\n<li>Outstanding invoices;<\/li>\n\n\n\n<li>Sales forecast;<\/li>\n\n\n\n<li>Historical collection performance;<\/li>\n\n\n\n<li>DSO, or average collection period;<\/li>\n\n\n\n<li>Customers at risk of being late.<\/li>\n<\/ul>\n\n<h3 class=\"wp-block-heading\"><strong>Payments<\/strong><\/h3>\n\n<ul class=\"wp-block-list\">\n<li>Supplier payment schedule;<\/li>\n\n\n\n<li>DPO or average payment period;<\/li>\n\n\n\n<li>Payroll;<\/li>\n\n\n\n<li>Taxes and withholdings;<\/li>\n\n\n\n<li>Debt and interest;<\/li>\n\n\n\n<li>Significant investments;<\/li>\n\n\n\n<li>Extraordinary commitments.<\/li>\n<\/ul>\n\n<h3 class=\"wp-block-heading\"><strong>Context variables<\/strong><\/h3>\n\n<ul class=\"wp-block-list\">\n<li>Seasonality;<\/li>\n\n\n\n<li>Consolidation of collections or payments;<\/li>\n\n\n\n<li>Renewal of policies or lines of coverage;<\/li>\n\n\n\n<li>Occasional cash flow issues;<\/li>\n\n\n\n<li>Business decisions that affect deadlines or terms.<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">In practice, the model should not attempt to replicate the entire universe. It should focus on the drivers that have the greatest impact on cash flow. <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"7\"><strong>Practical Example of Cash Flow Using the Direct Method<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">To better understand how it works, let&#8217;s look <strong>at<\/strong> a simple example of <strong>cash flow using the direct method<\/strong> in a weekly forecast.<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Opening balance for Week 1:<\/strong> 150,000 \u20ac<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Expected charges:<\/strong><\/p>\n\n<ul class=\"wp-block-list\">\n<li>Outstanding receivables: 85,000 \u20ac<\/li>\n\n\n\n<li>New sales with estimated revenue: 20,000 \u20ac<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\"><strong>Scheduled payments:<\/strong><\/p>\n\n<ul class=\"wp-block-list\">\n<li>Suppliers: 70,000 \u20ac<\/li>\n\n\n\n<li>Payroll: 35,000 \u20ac<\/li>\n\n\n\n<li>Taxes: 12,000 \u20ac<\/li>\n\n\n\n<li>Loan: 8,000 \u20ac<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\"><strong>Estimated ending balance for Week 1:<\/strong><strong><br\/><\/strong> 150,000 + 105,000 &#8211; 125,000 = 130,000 \u20ac<\/p>\n\n<p class=\"wp-block-paragraph\">If a lower cash inflow and a peak in payments are expected in Week 2, the model can show in advance that cash on hand will fall below the desired threshold. That visibility is precisely what makes the direct method an <strong>operational cash forecast<\/strong>. <\/p>\n\n<p class=\"wp-block-paragraph\">That said, a useful example isn&#8217;t limited to the formula. The important thing is to interpret what the data is telling us. If the box holds steady, great. If it starts to drop rapidly, the forecast should raise questions:   <\/p>\n\n<ul class=\"wp-block-list\">\n<li>Is this a one-time problem or a recurring one?<\/li>\n\n\n\n<li>Are the estimates too optimistic?<\/li>\n\n\n\n<li>Is it a good idea to renegotiate payments?<\/li>\n\n\n\n<li>Is additional funding needed?<\/li>\n\n\n\n<li>Are there any non-priority expenses that could be deferred?<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">A good model isn&#8217;t one that&#8217;s always right. It&#8217;s one that helps you make better decisions. <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"8\"><strong>What time horizon should be used?<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">The direct method works especially well in the short term, but that doesn&#8217;t mean it&#8217;s only useful for a few days. It&#8217;s common to combine different time horizons. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Short term: weekly<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">For the first few weeks (usually 12 or 13, covering one quarter), the <strong>weekly cash flow forecast<\/strong> typically offers the best balance between detail and usefulness. It allows you to track changes in liquidity more accurately and identify specific risks. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Medium term: monthly<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">Beyond the first quarter, it may be more efficient to work with a monthly perspective. Trying to maintain the same level of detail over several months tends to make the model unmanageable and\u2014let&#8217;s be honest\u2014quite a chore to maintain. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Rolling Cash Flow Forecast<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">One particularly recommended practice is to turn the model into a <strong>rolling cash flow forecast<\/strong>. In other words, update it on a regular basis, review actual results against projections, and extend the forecast horizon as the weeks go by. This prevents the forecast from becoming a static document that quickly becomes outdated.  <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"9\"><strong>How to Transition from a One-Time Model to a Recurring Process<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">Many companies manage to put together a fairly solid initial forecast. The problem arises later. Without a process in place, the model quickly deteriorates. To prevent this, it\u2019s best to work on three fronts.   <\/p>\n\n<p class=\"wp-block-paragraph\">As the model matures, many companies need to supplement this operational control with a <a href=\"https:\/\/nova-praxis.com\/prevision-caja-medio-plazo\/\">medium-term cash flow forecast<\/a> that allows them to gain perspective and plan further in advance.<\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Update Frequency<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">In situations where liquidity is tight, a weekly review is usually the most useful. It allows you to quickly adjust the forecast, incorporate confirmed receipts, reschedule payments, and recalculate the expected balance. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Comparison of Forecast vs. Actual<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">If the forecast says one thing and the actual results show another, we need to understand why. Comparing the forecast with the actual results is essential for improving the quality of the model. Sometimes the problem lies in collection times. Other times, it\u2019s due to underestimated expenses. And still other times, it\u2019s because the assumptions are too optimistic.    <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Adjustment of Assumptions<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">All forecasting requires learning. The direct method becomes more valuable as it is refined through experience: billing patterns are reviewed, fixed and variable payments are better distinguished, and recurring business patterns are identified. <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"10\"><strong>Common Mistakes When Applying the Direct Method<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">The direct method does not fail by definition. It usually fails due to how it is implemented. Here are some of the most common mistakes.  <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Wanting to model everything<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">More detail doesn&#8217;t always mean more usefulness. If the model becomes overly complex, maintaining it will end up costing more than the value it provides. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Relying on Weak Data<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">A forecast is only as good as the quality of the data. If receivables are overestimated or payables aren&#8217;t updated properly, the forecast ceases to be helpful and becomes nothing more than an illusion in table form. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Do not assign responsibility<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">The treasury department should not rely on a single person to track down information throughout the organization. Sales, purchasing, human resources, and finance typically have key data that must be fed into the model. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Do not compare forecast vs. actual<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">Without a comparison to reality, a forecast cannot learn. And a forecast that doesn&#8217;t learn eventually loses credibility. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Don&#8217;t use it to make a decision<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">This is perhaps the most costly mistake. If a company invests time in preparing a <strong>cash flow forecast<\/strong> but then fails to use it to schedule payments, secure financing, or prioritize spending, the effort amounts to nothing more than financial window dressing. <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"11\"><strong>How to Use Cash Flow Forecasting to Make Better Decisions<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">When the model is well-constructed, its usefulness goes far beyond simply \u201cseeing how the business is doing.\u201d It helps you make decisions with greater foresight and less improvisation. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Make more informed payment decisions<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">Not all payments have the same impact or the same urgency. Forecasting allows you to prioritize and avoid last-minute, reactive decisions. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Manage Funding<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">If the model predicts a liquidity crunch, the company can take action before it occurs. This improves its ability to negotiate credit lines or restructure its financing needs. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Making Use of Surplus<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">Cash management isn&#8217;t just about putting out fires. It can also help identify periods of financial flexibility and optimize surpluses more effectively. <\/p>\n\n<h3 class=\"wp-block-heading\"><strong>Improving Internal Communication<\/strong><\/h3>\n\n<p class=\"wp-block-paragraph\">When there is a solid forecast, the dialogue between departments changes. Liquidity is no longer a matter of intuition; it becomes a visible, shared, and actionable variable. <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"12\"><strong>The direct method as a management tool, not just a calculation tool<\/strong><\/h2>\n\n<p class=\"wp-block-paragraph\">The great value of the direct method does not lie in the formula. It lies in its ability to connect financial data with the company\u2019s operational reality. That\u2019s why it\u2019s so useful in treasury. Because it helps answer the question that really matters when liquidity is tight: what\u2019s going to happen to cash flow, and how much wiggle room is there before it\u2019s too late?   <\/p>\n\n<p class=\"wp-block-paragraph\">Applying this approach judiciously makes it possible to develop a <a href=\"https:\/\/nova-praxis.com\/prevision-caja-medio-plazo\/\"><strong>more useful cash flow forecast<\/strong><\/a> , a more realistic <strong>liquidity forecast<\/strong>, and an action-oriented <strong>cash flow forecast<\/strong>. When done right, it becomes a key tool for identifying risks, sustaining growth, reducing the need for improvisation, and making decisions with greater confidence. <\/p>\n\n<h2 class=\"wp-block-heading\" id=\"13\"><strong>FAQ on the Direct Cash Forecasting Method<\/strong><\/h2>\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1776152521540\"><strong class=\"schema-faq-question\"><strong>What is the direct cash flow method?<\/strong><\/strong> <p class=\"schema-faq-answer\">This method calculates cash flow based on <strong>actual or projected receipts and payments<\/strong>. It starts with the <strong>current cash balance<\/strong> and projects cash inflows and outflows to construct a cash flow timeline. <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152584070\"><strong class=\"schema-faq-question\"><strong>What is the direct method used for in treasury management?<\/strong><\/strong> <p class=\"schema-faq-answer\">It is used to <strong>manage actual liquidity<\/strong>, anticipate whether there will be enough money to make payments, identify cash flow constraints, and support decisions regarding payments, financing, or the use of surplus funds.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152606197\"><strong class=\"schema-faq-question\"><strong>What is the difference between the direct and indirect methods?<\/strong><\/strong> <p class=\"schema-faq-answer\">The <strong>direct method<\/strong> shows <strong>what actually comes in and goes out<\/strong>; the <strong>indirect method<\/strong> starts with the accounting result and explains <strong>why the cash balance changes<\/strong> through adjustments and changes in cash on hand. They are complementary, but the direct method is more useful for operational cash management. <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152630955\"><strong class=\"schema-faq-question\"><strong>Which time horizon is best suited for the direct method?<\/strong><\/strong> <p class=\"schema-faq-answer\">It is usually particularly useful for periods of less than <strong>90 days<\/strong>, although it can be extended up to one year. A <strong>weekly<\/strong> breakdown is recommended for the first-quarter forecast (12 or 13 weeks), followed by a <strong>monthly<\/strong> breakdown for the remainder of the year starting from the forecast date. <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152665921\"><strong class=\"schema-faq-question\"><strong>What variables should I include in a direct model?<\/strong><\/strong> <p class=\"schema-faq-answer\">At a minimum: <strong>opening balance<\/strong>, <strong>collections<\/strong>, <strong>payments to suppliers<\/strong>, <strong>payroll<\/strong>, <strong>taxes<\/strong>, <strong>debt\/financing<\/strong>, and <strong>relevant CAPEX<\/strong>. Nova also highlights the role of <strong>DSO<\/strong> and <strong>DPO<\/strong> as key drivers. <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152680891\"><strong class=\"schema-faq-question\"><strong>What is the basic formula for the direct method?<\/strong><\/strong> <p class=\"schema-faq-answer\">The basic formula is: <strong>Beginning balance + Receipts \u2013 Payments = Ending balance<\/strong>.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152700716\"><strong class=\"schema-faq-question\"><strong>What are the most common mistakes?<\/strong><\/strong> <p class=\"schema-faq-answer\">Working with <strong>unreliable data<\/strong>, demanding <strong>too much detail<\/strong>, failing to assign <strong>responsibility by area<\/strong>, failing to compare <strong>forecasts with actual results<\/strong>, and failing to use the model to make actual decisions.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152720991\"><strong class=\"schema-faq-question\"><strong>What level of detail is appropriate?<\/strong><\/strong> <p class=\"schema-faq-answer\">Generating a short- to medium-term cash flow forecast using the direct method requires high-quality data as well as a complex management process; therefore, it is not recommended to include an excessive level of detail, but rather just enough to keep the forecast manageable. For example, if the customer or supplier level is relevant, it is advisable to break down the major customers or suppliers with the highest individual volumes, and to group the rest together. It is very useful to maintain the level of detail at the retail sales level or by major product. It is also very helpful to have the breakdown by bank account or, failing that, by market.   <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152743357\"><strong class=\"schema-faq-question\"><strong>What technology do I need?<\/strong><\/strong> <p class=\"schema-faq-answer\">At Nova, we recommend building a medium-term cash flow model on an EPM platform such as OneStream, Oracle, or Jedox, integrated with the ERP and payroll systems, and complemented by a treasury management system (TMS) such as Kyriba, FIS, or SageXRT<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776152759761\"><strong class=\"schema-faq-question\"><strong>How can artificial intelligence help us?<\/strong><\/strong> <p class=\"schema-faq-answer\">Artificial intelligence can be of great help in automating the cash flow forecasting model using AI agents. Another option is to apply predictive algorithms to accurately estimate payment periods. <\/p> <\/div> <\/div>\n\n<p class=\"wp-block-paragraph\">At Nova, we help companies transform their treasury into a more robust decision-making system by connecting data, processes, and financial forecasting to improve cash flow visibility and proactively identify risks.<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>If you want to <\/strong><a href=\"https:\/\/nova-praxis.com\/en\/automated-cash-flow\/\"><strong>design a cash flow forecast model<\/strong><\/a><strong> that\u2019s truly useful for your business, let\u2019s talk.<\/strong><\/p>\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Table of Contents Having sales, profit margins, and even an annual budget does not guarantee day-to-day financial health. Many companies operate seemingly normally until the problem that no one wants to face comes to light: a lack of liquid resources &#8230; <a title=\"Direct Cash Flow Method: How to Apply It in Cash Flow Forecasting\" class=\"read-more\" href=\"https:\/\/nova-praxis.com\/en\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\/\" aria-label=\"Read more about Direct Cash Flow Method: How to Apply It in Cash Flow Forecasting\">Read more<\/a><\/p>\n","protected":false},"author":6,"featured_media":16581,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[47],"tags":[],"class_list":["post-17651","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-fpm"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Direct Cash Flow Method | 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is the direct cash flow method?\",\"answerCount\":1,\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"This method calculates cash flow based on <strong>actual or projected receipts and payments<\\\/strong>. It starts with the <strong>current cash balance<\\\/strong> and projects cash inflows and outflows to construct a cash flow timeline. \",\"inLanguage\":\"en-US\"},\"inLanguage\":\"en-US\"},{\"@type\":\"Question\",\"@id\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152584070\",\"position\":2,\"url\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152584070\",\"name\":\"What is the direct method used for in treasury management?\",\"answerCount\":1,\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"It is used to <strong>manage actual liquidity<\\\/strong>, anticipate whether there will be enough money to make payments, identify cash flow constraints, and support decisions regarding payments, financing, or the use of surplus funds.\",\"inLanguage\":\"en-US\"},\"inLanguage\":\"en-US\"},{\"@type\":\"Question\",\"@id\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152606197\",\"position\":3,\"url\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152606197\",\"name\":\"What is the difference between the direct and indirect methods?\",\"answerCount\":1,\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"The <strong>direct method<\\\/strong> shows <strong>what actually comes in and goes out<\\\/strong>; the <strong>indirect method<\\\/strong> starts with the accounting result and explains <strong>why the cash balance changes<\\\/strong> through adjustments and changes in cash on hand. They are complementary, but the direct method is more useful for operational cash management. \",\"inLanguage\":\"en-US\"},\"inLanguage\":\"en-US\"},{\"@type\":\"Question\",\"@id\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152630955\",\"position\":4,\"url\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152630955\",\"name\":\"Which time horizon is best suited for the direct method?\",\"answerCount\":1,\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"It is usually particularly useful for periods of less than <strong>90 days<\\\/strong>, although it can be extended up to one year. A <strong>weekly<\\\/strong> breakdown is recommended for the first-quarter forecast (12 or 13 weeks), followed by a <strong>monthly<\\\/strong> breakdown for the remainder of the year starting from the forecast date. \",\"inLanguage\":\"en-US\"},\"inLanguage\":\"en-US\"},{\"@type\":\"Question\",\"@id\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152665921\",\"position\":5,\"url\":\"https:\\\/\\\/nova-praxis.com\\\/en\\\/direct-cash-flow-method-how-to-apply-it-in-cash-flow-forecasting\\\/#faq-question-1776152665921\",\"name\":\"What variables should I include in a direct model?\",\"answerCount\":1,\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"At a minimum: <strong>opening balance<\\\/strong>, <strong>collections<\\\/strong>, <strong>payments to suppliers<\\\/strong>, <strong>payroll<\\\/strong>, <strong>taxes<\\\/strong>, <strong>debt\\\/financing<\\\/strong>, and <strong>relevant CAPEX<\\\/strong>. 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