Introduction to Waterfall Calculations (2023)

  • Introduction to Waterfall Calculations (4)Product Title 01


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Course Description

Waterfall calculations are used to allocate cash flow among two or more partners based on their agreed-upon return parameters. In this course, Excel expert David Ringstrom, CPA, brings his prior commercial real estate experience to the forefront by walking you through assembling a waterfall calculation from scratch. David starts with a blank worksheet and details every input and formula. He covers such concepts as range names, although he provides cell-address references you can use in lieu of range names if so desired. David contrasts using the IRR worksheet function versus the XIRR worksheet function for computing investment returns. Additional worksheet functions—MIN, ROUND, DATE, SUMIF, and others—are included in David’s discussion. Check figures are used extensively throughout the model to ensure data integrity. Check figures also empower users to easily follow the calculations through the tiers.

Topics Covered:

  • Summarizing the investment parameters to be incorporated into a waterfall calculation.
  • Building a waterfall calculation from scratch, starting with a blank worksheet.
  • Using range names to streamline formulas and bookmark key inputs within a workbook.
  • Utilizing Excel’s Name Manager feature to review and manage named ranges within a workbook.
  • Building a series of dates with the Fill Series command.
  • Improving the integrity of spreadsheets by using SUMIF to look up values in a more flexible fashion than VLOOKUP.
  • Building a series of self-updating dates with Excel’s DATE function.
  • Writing formulas by choosing named ranges with the Use In Formula command, thereby saving you time.
  • Incorporating decisions into calculations with Excel’s IF function.
  • Saving time by using the AutoSum formula to sum multiple columns at once with a mouse click or a keyboard shortcut.
  • Computing the internal rate of return for a series of cash flows with the IRR function.
  • Understanding how XIRR provides more accurate return calculations than IRR.
  • Computing returns on irregular cash flow distributions when needed.
  • Maximizing worksheet cells by using custom number formats to display text within cells that contain numeric values.
  • Returning the smallest value from two or more amounts by way of the MIN function.
  • Applying formatting to multiple locations within a worksheet by way of the Format Painter feature.
  • Using Excel’s ROUND function to round numbers to the nearest 10, 100, 1000, or beyond.

Learning Objectives:

  • Identify the worksheet function that enables you to calculate a return for a series of cash flows distributed at irregular dates.
  • Define the purpose of the MIN function.
  • Recall the arguments for the IF worksheet function.

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Introduction to Waterfall Calculations (5)

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What is the waterfall calculation method? ›

Waterfall calculations are used to allocate cash flow among two or more partners based on their agreed-upon return parameters. In this course, Excel expert David Ringstrom, CPA, brings his prior commercial real estate experience to the forefront by walking you through assembling a waterfall calculation from scratch.

What is a typical waterfall in private equity? ›

The typical waterfall structure requires limited partners to get their contributed capital for investments and management first, followed by the preferred return, and finally, the excess return net of the carry to the GP.

What are the different types of waterfall calculations? ›

There are two common types of waterfall structures - American, which favors the general partner, and European, which is more investor-friendly. An American-style distribution schedule is applied on a deal-by-deal basis, and not at the fund level.

What is the waterfall payout model? ›

Waterfall structures allow investors to provide the sponsor with financial incentives that are intended to motivate them to achieve even bigger returns. However, if returns come in lower than expected, the sponsor receives a lower share of profits under a distribution waterfall model.

What are the 6 stages of waterfall method? ›

The 6 phases of the waterfall project management methodology
  • Requirements phase. This is the initial planning process in which the team gathers as much information as possible to ensure a successful project. ...
  • System design phase. ...
  • Implementation phase. ...
  • Testing phase. ...
  • Deployment phase. ...
  • Maintenance phase.
Jan 12, 2022

How to do a waterfall calculation in Excel? ›

Select your data. Click Insert > Insert Waterfall or Stock chart > Waterfall. You can also use the All Charts tab in Recommended Charts to create a waterfall chart.

Which waterfall method is better in private equity? ›

European-style waterfalls (also called Global-style) give a higher priority to investors, requiring that investors receive all distributions from the fund until they have fully recovered their overall investment and achieved the hurdle rate in returns before the general partner can receive any portion of proceeds.

Why is waterfall high risk? ›

A third challenge of using the waterfall model is that it creates a high dependency and risk among the stages and the tasks of the project. Each stage depends on the completion and approval of the previous one, and any delay or error can affect the whole project.

What are the two types of waterfall distribution? ›

The two most common forms of distribution waterfalls are the American Waterfall Model and the European Waterfall Model. LPs typically favor the European waterfall, whereas GPs prefer the American waterfall model. In the American waterfall model, the GPs benefit more.

What are the 5 stages of waterfall methodology? ›

Phases of waterfall project management differ from one project to another. But generally, you can group the activities of the waterfall approach into five stages: planning, design, implementation, verification, and maintenance.

What is waterfall model in simple words? ›

The Waterfall Model is a linear application development model that uses rigid phases: When one phase ends, the next begins. Steps occur in sequence, and, if unmodified, the model does not allow developers to go back to previous steps (hence “waterfall”: Once water falls down, it cannot go back up).

What is the American style waterfall structure? ›

An American waterfall is the opposite of the European structure. In the American structure, the General Partner can receive carried interest before the Limited Partners have received their money back. This arrangement is sometimes referred to as the deal-by-deal model and is more favorable for the General Partner.

What is a waterfall financial analysis? ›

Waterfall analysis, a complex economic return modeling method, shows how exit revenues are distributed to a company's many stakeholders. A waterfall analysis displays the sequential breakdown of a starting value to a final result by demonstrating intermediate values and 'leakage' points in the process.

What is the preferred return of a waterfall? ›

The main feature of the Private Equity Waterfall which ensures the Limited Partner's priority is the initial return paid on their capital invested as well as the return of capital. This is referred to as the Preferred Return (often simply called “pref”) because it is the first cash flow paid to equity partners.

What is waterfall approach strategy? ›

Waterfall relies on teams following a sequence of steps and never moving forward until the previous phase has been completed. This structure is suited to smaller projects with deliverables that are easy to define from the start.

What is waterfall method common for? ›

It contains five phases of management, where each requires a deliverable from the previous phase to proceed. Waterfall is ideal for projects like software development, where the end result is clearly established before starting, and is best suited for projects that require a lot of predictability.

What does waterfall mean in valuation? ›

A waterfall structure can be thought of as a series of pools where cash flows from an asset fill a single section, before spilling over into the next one. Each pool represents an agreement on how the asset's cash proceeds will be distributed. Below is an example of how a waterfall model looks visually in action.

How do you calculate waterfall pressure? ›

P = ρ g h = 1000 × 9.8 × 6 = 58800 Pa. A waterfall has a height of 200 m. Determine the pressure loss when it reaches the surface.

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