Direct method
In one sentenceA way of presenting operating cash flows that lists the actual cash receipts and payments by type, such as amounts collected from customers and paid to suppliers and employees.
Simply put
It is the easiest for a business owner to understand: you see clearly how much came in from customers and how much went out to each party. It requires the cash and bank movements to be well classified in the books.
The final net operating cash flow is the same under both methods; the difference is only in the way it is presented.
Worked example
A pharmacy collected 1,100,000 SAR from customers and insurers, and paid 700,000 SAR to suppliers, 250,000 SAR in salaries and 50,000 SAR in other expenses.
Received from customers1,100,000
Paid to suppliers(700,000)
Paid to employees(250,000)
Other expenses paid(50,000)
Net operating cash flow = 1,100,000 − 700,000 − 250,000 − 50,000100,000 SAR
Don't confuse it with
Indirect methodThe indirect method starts from net profit and adjusts it, while the direct method lists the receipts and payments themselves.