When using the indirect method for presenting your company’s cash flows for operating activities, one part of the statement also includes lines like “Changes in receivables and prepayments” and “Changes in payables and prepayments”. The keyword here is “Changes”. It’s not a direct outflow or inflow, but a change in balance.

First off those changes reflect part of the cash flows only in combination with the profit. As you know, the indirect method of presenting the operating cash flows starts either from net or operating profit. The profit then needs to be adjusted with those changes to reach the out- and inflows.

Changes in payables and receivables work the exact opposite – if the receivables have increased for an example, you have technically received less money, so the effect on the statement in case the balance has increased compared to previous balance sheet, is negative outflow. It’s the exact opposite in the case with payables. If the balance has increased, it means you have paid less money so the effect on the statement is positive inflow. And of course, in the case where the receivables have decreased, it’s a positive effect on the statement and if the payables have decreased, it’s a negative outflow on the statement.

Effectively the change is something that shows how much of the receivables have you received over the year and how much of your debt have you paid. Even without the income and expenses in between, without any of that, you’d still generate outflow for an example when you pay off your debt. You still generate inflow when you receive some of your receivables. If you think about that, making sure there’s an appropriate sign before those changes really becomes easy.