Guide / Retain or release

Debt service, reserves and distributions

Before deciding what leaves the business, distinguish cash that is spent from cash that is held for a purpose.

By Seth Sokoloff · Published October 11, 2026 · 5 minute read

A cash waterfall makes priorities visible, but the order is not universal. A lender-controlled account structure, an ordinary operating business and a fund distribution agreement may all use the word “waterfall” for materially different mechanics. This site models an illustrative operating allocation. It does not calculate investor preferred returns, promote tiers, catch-ups or internal rates of return.

Five steps, with a clear boundary

In this calculator, unrestricted opening cash and period inflows form one pool. The model then funds operating obligations, tax payments, debt service and a new reserve earmark, in that order. Each allocation is the lesser of its request and the remaining pool. Optional distributions are capped at the cash remaining above a separately entered unrestricted cash floor.

That order is a teaching example, not a recommendation to prioritize one creditor over another. Actual payment obligations, account restrictions, legal requirements and contractual remedies may require another sequence. Debt service in the input should include only the cash payments you are modeling for the chosen period; avoid also including those amounts in operating obligations.

A reserve is retained cash

Suppose $1 million is available. The business pays $700,000 to external parties, then earmarks $100,000 as a reserve. It has $200,000 of unrestricted cash and $100,000 of newly earmarked cash: $300,000 remains in total. Treating reserve funding as an external payment and also subtracting it from total ending cash would lose $100,000 in the reconciliation.

A cash floor is different from a reserve

The floor in this model is the minimum unrestricted balance retained before making an optional distribution. It is not another pot of cash to add to the ending balance. If unrestricted cash is $200,000 and the floor is $150,000, at most $50,000 is arithmetically available for a distribution.

Earlier priorities can consume cash below the floor. The tool flags that gap rather than inventing a borrowing source or refusing an earlier payment. Increasing the floor reduces distribution capacity, but it does not create cash or cure an unfunded operating obligation.

Positive cash does not establish distribution permission

Real agreements can place conditions on releasing funds. As a concrete example, the SEC-filed 2022 Cheniere Corpus Christi security and account agreement specifies a cash priority sequence, reserve funding and conditions connected to restricted payments. It also has separate provisions governing accounts during a declared event of default. That is one agreement’s structure, not a template for every business.

The broader point is to read the governing documents before using apparent cash surplus as a release signal. A spreadsheet can show liquidity while overlooking restrictions, unavailable subsidiary balances or a payment date that has not yet arrived.

Questions to take into the decision

• Availability: Is the cash cleared, accessible in the right entity and account, and usable for this purpose?
• Obligations: Have the amounts and dates of required payments been confirmed without duplication?
• Reserves: Is the reserve an incremental funding need or an existing balance? Is its use restricted?
• Permissions: What conditions, approvals, notices or calculations does the governing agreement require?
• Forward liquidity: What happens to the next several weeks’ cash position if the proposed distribution occurs?

For a management decision, connect the allocation to the timing of the cash forecast and the company’s actual documents. Connect investment alternatives to value creation priorities, and consider entity-by-entity integration needs when managing an acquisition platform.