Cash flow refers to how often cash changes hands from you to your creditors and back again. Positive cash flow means you have more cash coming in than going out. This is usually a sign of a financially healthy company. Similarly, individuals can check their financial health by calculating their personal cash flow from year to year, based on their tax returns.
1. Gather your tax returns from the past two years, including the most recent return.
2. Record your total income from this year, and write down and subtract your wages from this income. These wages are not as accurate when using historical data so they must be adjusted. Subtract any tax refunds, non-recurring alimony payments and non-recurring unemployment income. Subtract excluded income and investment income.
3. Record other sources of income for this year such as rental income and capital gains, and add these back to your total income. Record the total income for this year.
4. Repeat the process using your information from last year's tax return.
5. Compare the total income from this year and last year. Subtract last year's total income from this year's total income. If the result is positive, your cash flow is positive and you are in good financial shape.
Items you will need
- Last two income tax returns
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