The 5-Account Cash Flow Waterfall System

Most founders either starve themselves or starve the business. Rarely do they strike a healthy balance.

We convince ourselves it’s noble to reinvest every penny back into the business, or we pull too much cash and run operations on fumes.

Neither is sustainable.

That’s why I recommend installing The 5-Account Cash Flow Waterfall…a cash management system built to ensure you're covering expenses, preparing for taxes, weathering storms, investing in growth, and most importantly...paying yourself!

It looks something like this…

To make this work, you’re going to need a minimum of 5 bank accounts:

Account #1: Operating Account (1 Month of Total Expenses)

This is your day-to-day checking account: payroll, rent, vendors, subscriptions, ads, etc.

Keep one month’s worth of total operating expenses in here, no more. Cash left in this account has a way of getting spent, because the optimistic entrepreneur’s ability to spend will always outpace their ability to earn.

At the end of the month, every dollar over your 1-month opex amount should “waterfall” into the following accounts before it gets “accidentally spent.”

Account #2: Tax Savings Account (25–35% of Net Profit)

This account exists so tax time never takes you by surprise. Talk to your accountant about how much you should be setting aside, but a good rule of thumb is 25–35% of your monthly profit.

The IRS is the only “vendor” that can take away your business and your liberty, so transfer funds here every week or month like clockwork. This account is untouchable. The IRS doesn’t play around.

Account #3: Emergency Fund (3 Months of Fixed Expenses)

This should be a basic savings account, and its purpose is survival…not ROI.

Add up all your non-negotiables: payroll, rent, utilities...the bills you need to keep paying if you want to continue operating, and multiply that number by 3. That’s the amount you should have in cash in an emergency fund.

Once that’s done, decide whether you want to scale to 6 based on risk tolerance. You can use these funds to secure lines of credit to extend your availability of cash further, but DO NOT put these funds in an investment account riskier than a money market. Again, its purpose is risk-reduction, not ROI.

With your taxes taken care of and your emergency account funded, now things get really fun…

Account #4: Future Investment Funds (a.k.a. Sinking Funds)

Big expenses are always on the horizon: new equipment, annual events, hiring surges, product launch media budgets, holiday bonuses, that big new building you've been eyeing…you get the idea.

These extraordinary expenses are all knowable and plannable, which means they shouldn’t feel like surprises, nor should they impact your cash flow…because they should NOT be paid out of your operating account.

Here’s what you should do, instead…

For each of these future, planned expenditures, you should establish a dedicated “Future Investment” checking account with one sub-account per goal.

Once the accounts/sub-accounts are open, assign a target number, and fund them gradually each month as the overflow cash “waterfalls” out of your OPEX and over your Tax and Emergency accounts.

Account #5: Distribution Account (Owner Payouts)

This account is your reward bucket. When the other accounts are full, the overflow comes here.

Every quarter, distribute 80% of what's in the account. Leave 20% behind for a cushion during the year, then distribute it all out at the end of the year so you get a nice, extra bonus right when you need it.

The ultimate sign of a healthy business is a growing Distribution Account.

If you’re never seeing cash land here...it’s time to ask why.

⚡ Action Step: Open these 5 accounts. Name them, and establish a practice of moving your cash at the same time every month. (Here’s a video walkthrough that should help.) This simple system forces discipline, reduces surprise expenses, and creates space for meaningful owner distributions. In short, it’s how you build a real business...not just a high-stress job.

Quick Hits

Here’s some other content from the Scalable network you might have missed:

• 🧰 Tool of the Week: This free “Cashflow Waterfall” worksheet helps you turn every dollar of revenue into profit…before it disappears. (And it’s the perfect complement to today’s newsletter issue.)

• 🤖 Here’s how we’re pivoting one of our company’s business models from “Training Humans” to “Training AIs”

• 🏖️ How I take 30-day vacations as a “crazy-busy” 9-figure founder. (Watch this before summer passes you by.)

• 🧮 A “brief” guide to scenario modeling in uncertain times. (Business nerds, unite!)

• ⚖️ Why “stability” has become the new luxury and why marketers should STOP selling innovation and start selling “certainty.”

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