Answers / Corporate Treasury

When would you build a cash forecast using the direct method versus the indirect method, and what are the limits of each?

A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

The direct method forecasts actual receipts and disbursements — collections, payroll, supplier runs, tax, debt service — and is the right tool for short-horizon operational liquidity (the rolling 13-week), because it shows exactly when cash moves and pinpoints a shortfall to a specific week. Its limit is effort and data: it needs granular operational input and degrades over longer horizons. The indirect method starts from projected net income and adjusts for non-cash items and working-capital changes; it ties cleanly to the P&L and balance sheet and suits medium/long-term planning and covenant projection, but it's too coarse to manage day-to-day liquidity. In practice treasurers run direct short-term and indirect long-term, reconciling the two.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Direct = receipts/disbursements, best short-term/13-week
  • ✓Indirect = from net income + WC, best medium/long-term
  • ✓Direct pinpoints timing; needs granular data
  • ✓Run both and reconcile

COMMON MISTAKES

  • ✗Using indirect for daily liquidity management
  • ✗Not knowing the difference
  • ✗Claiming one method fits all horizons

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