Common Mistakes to Avoid When Using a Cashflow Waterfall
- Sakira Jackson
- Nov 19, 2024
- 2 min read
A cashflow waterfall is a powerful tool, but like any system, its success depends on how well it’s implemented. While the concept is straightforward, many businesses make mistakes that reduce its effectiveness. In this post, we’ll outline the most common pitfalls and how to avoid them.
1. Failing to Automate Transfers
The cashflow waterfall relies on consistent allocation of funds. When transfers are done manually, it’s easy to forget or delay them, especially during busy periods.
The Problem:Missed or irregular transfers can lead to underfunded accounts and disrupt your financial plan.
How to Avoid It:
Set up automatic weekly or biweekly transfers for each account.
Most banks and accounting software (like QuickBooks) offer this feature.
2. Overestimating Revenue
Allocating funds based on projected income, rather than actual revenue, can create significant cashflow issues.
The Problem:If your revenue falls short of expectations, you may not have enough to cover critical expenses or maintain your profit margins.
How to Avoid It:
Always base allocations on actual income.
Adjust percentages during months of higher or lower revenue to maintain balance.
3. Dipping Into Restricted Accounts
Each account in the cashflow waterfall serves a specific purpose. Using funds from one account (e.g., taxes or emergency savings) to cover unrelated expenses defeats the system’s purpose.
The Problem:Borrowing from restricted accounts can leave you unprepared for tax payments or emergencies.
How to Avoid It:
Treat accounts like sacred funds—only use them for their intended purposes.
If necessary, adjust future allocations to make up for unexpected shortfalls.
4. Ignoring Expense Management
The cashflow waterfall allocates funds, but it doesn’t fix overspending habits. Without disciplined expense management, you may deplete your accounts faster than expected.
The Problem:Exceeding your expense allocation can undermine the entire system.
How to Avoid It:
Regularly audit your expenses to identify unnecessary costs.
Use tools like Trello or Excel to track spending and stay within your budget.
5. Not Adjusting Percentages Over Time
Your business’s needs will evolve as it grows. Failing to revisit and adjust your waterfall percentages can result in inefficiencies.
The Problem:Stagnant allocations may no longer reflect your business priorities.
How to Avoid It:
Schedule quarterly reviews of your waterfall system.
Adjust percentages to reflect changes in revenue, expenses, or growth goals.
6. Lack of Discipline
The cashflow waterfall requires commitment. Skipping transfers, overspending, or neglecting reviews can erode its effectiveness.
The Problem:Inconsistent use of the system leads to missed opportunities and financial instability.
How to Avoid It:
Treat the waterfall as a non-negotiable part of your financial management.
Set reminders or accountability measures to stay on track.
Final Thoughts
The cashflow waterfall is a simple yet powerful system for managing business finances, but it requires discipline, automation, and regular reviews to work effectively. By avoiding these common mistakes, you’ll ensure your system runs smoothly and delivers the financial stability and growth you need.
In the next post, we’ll explore how the cashflow waterfall can help your business thrive during economic downturns. Stay tuned!
Comments