Cash Priority Rules

This article explains cash priority rules in Model Reef.

You will learn:

• The implied order in which cash is allocated to different uses.

• The distinction between mandatory and discretionary cash outflows.

• How cash priority is reflected in the Cash Waterfall and valuation.

Model Reef does not enforce a hard legal waterfall, but the reporting structure embodies sensible economic priorities.

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1. Mandatory vs discretionary cashflows

Cashflows can be thought of as:

• Mandatory

  • Payments that the business must make to keep operating and to comply with obligations.

  • Examples: supplier payments, staff costs, interest, tax, minimum capex in some cases.

• Discretionary

  • Payments that the business chooses to make after mandatory items are covered.

  • Examples: growth capex, additional debt repayments, dividends, buybacks.

Model Reef represents both, but does not automatically restrict dividends or capex based on cash availability. That is a modelling and decision responsibility.

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2. Priority order in the Cash Waterfall

The Cash Waterfall layout embodies a typical priority order. Use the steps below to inspect each layer of priority and how it appears in reporting.

1

Operating performance and working capital

• Revenue, COGS, Opex, Staff costs, Tax paid.

• Change in net working capital.

2

Operating free cashflow

• Cash available before capex and financing.

3

Capex and investing needs

• Capital expenditure for maintaining and growing the asset base.

4

Debt service and debt movements

• Interest paid.

• Contractual debt repayments.

• Additional drawdowns or optional early repayments.

5

Equity flows

• Equity injections.

• Dividends and other equity distributions.

This ordering helps stakeholders see whether free cashflow covers required payments before discretionary items.

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3. Cash priority and modelling decisions

You can use the waterfall and priority order to test questions such as:

• Does operating cashflow cover interest and tax comfortably.

• Is capex fully funded from internal cashflows or does it require debt or equity.

• Are dividends affordable once debt service obligations are met.

• How much flexibility exists to adjust capex, debt repayments or dividends in downside scenarios.

Model Reef does not automatically block negative cash balances, but negative cash and borrowing needs are visible in cash balances and financing requirements.

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4. Cash priority and valuation

In valuation:

• Priority rules inform how you think about sustainable dividends and reinvestment rates.

• They also influence assumptions about debt capacity and equity returns.

• For structured finance or project deals you can emulate stricter priority structures in how you build debt and dividend variables.

The engine ensures that cashflows always reconcile. Priority analysis is then a matter of interpretation and design, not reconciliation work.

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Related articles

• Support/Service Team Capacity

• Build a Stress Test / Downside Case

• Getting Started

• Period Toggle Rules