From the course: Financial Modeling Foundations

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Waterfalls and models

Waterfalls and models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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Waterfalls and models

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- [Instructor] Waterfalls are a concept used in financial modeling to help deal with how profits are split out to various buckets or stakeholders over time. One common example of this occurs with profit distributions to bondholders, preferred stockholders, and then common stockholders. This is an illustration of a cash flow waterfall. So, in this case, the water, of course, is a metaphor for cash or profits from the firm, and, in this particular instance, we have our initial highest priority bucket, or the highest step in the waterfall, is for project operations and maintenance. And you can think of this as the ongoing expenses for the company. Right? When a company brings in sales, the first thing it has to do is pay to keep the lights on, pay to keep its employees there, pay for inventory, things like that. Whatever money is left over from that can be used to pay senior debt, in particular loans from banks, from bondholders, etc. From there, we'd probably want to build up a reserve…

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