Making Sense of Cashflow for an Individual

Thinking of cashflow for an individuals differs from the traditional logic for corporate cashflow in the following ways:

  1. 99% of individuals do not/should not use accrual accounting.

  2. Thus, only the direct cashflow calculation method applies to individuals.

i.e. Accrual accounting, and the indirect cashflow calculation method should be avoided when applied to individuals.

What does this mean?

First, this means that an individual’s accounting system should operate on a cash basis, meaning records should be made when transaction take place (i.e. not when they are scheduled). Second, when calculating cashflow in the direct method, one should simply replace/equate the Income Statement to the first section of the cashflow statement, which is cashflow from operating activities.

The 3 components of a cashflow statement are:

  • Cashflow form Operating Activities = Income Statement

  • Cashflow form Investing Activities = Linked to Assets

  • Cashflow from Financing Activities = Linked to Liabilities

The changes in the cash position based on these 3 components, i.e. the delta between the starting balance and the ending balance is the individual’s cashflow.

Moreover, an individual can have one of 3 cashflow patterns:

  1. Employment -> Taxes Deducted -> Payout/Deposit -> Expenses -> Repeat. (no material balance sheet interaction)

  2. Employment > Taxes Deducted -> Payout/Deposit -> Expenses -> Liabilities and possibly some Asset purchases. Repeat. (balance sheet interactions are centered around liabilities, maybe assets)

  3. Assets -> Income -> Investing -> Liabilities -> Expenses - Taxes on remaining balance. Repeat. (emphasis on assets and income).

For an overview on personal cashflow go here:

For an example of how to calculate your cashflow statement, linked to the other two financial statements:

If you don’t understand any of this, start here: