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Waterfall Chart

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A common waterfall chart is used to demonstrate how an initial value is increased and lowered by a sequence of intermediate values, eventually leading to a final value.

The waterfall chart is extensively used in the finance industry to demonstrate how a net value is calculated by separating the aggregate effect of positive and negative contributions.

What Is A Waterfall Chart?

A waterfall chart is a type of data visualization that shows the cumulative effect of consecutively added positive or negative numbers. These intermediate values might be time- or category-based. Because of the apparent suspension of columns (bricks) in mid-air, the waterfall chart is also known as a flying bricks chart or Mario chart. It is frequently referred to as a bridge in finance.

Waterfall charts were popularized in client presentations by the strategic consulting company McKinsey & Company. Waterfall charts may be made more complex by include additional total columns and values that span the axis. Extreme increments and decrements might lead the cumulative total to fall along each axis at certain places. Between floating columns, intermediate subtotals, displayed with entire columns, can be added to the graph.

EXAMPLE

An inventory audit of men’s t-shirts in a retail shop is the most basic example. You must determine how many salable t-shirts you have on hand to begin the next month. Typically, there will be some units on hand to begin the month. Some of the units will be destroyed while the t-shirt is on display and various individuals try it on. Some of these damaged units might be rehabilitated and added to the stock, bringing us to the total number of salable units.

So, in this waterfall chart (also known as the bridge chart), the starting value of “Units in stock” goes through a succession of ups and downs, one up and one down to be precise to get the final value of salable units. This is also known as Waterfall Reporting.

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How Does A Waterfall Chart Work?

One of the few unbreakable criteria of data visualization is that all bar charts must have a common baseline of zero. In a waterfall chart, this is still true, but it only pertains to the first bar, which shows the beginning value, and the last bar, which shows the end value. The baselines of the component bars between these totals vary and are determined by the running total. To put it another way, the end of the previous bar is the baseline of the following one for the parts in the center of a waterfall chart. The effect is that a staircase moves up and down, connecting two (or more) pillars.

The premise is straightforward, but because we aren’t used to seeing bars floating in space, viewers may find it difficult to comprehend the waterfall at first look. One complicated element is that the “baseline” of these component bars is sometimes at the top of the bar (if that component has a negative value), and sometimes at the bottom of the bar (for positive values).

Waterfall charts can span numerous time periods, which complicates matters even further. A waterfall that depicts changes over many quarters of the year may contain more than two “pillars”: one for the first quarter’s total and one more for each of the succeeding quarters. We have multiple unique sections of component bars representing the profits and losses from various periods between these pillars. Instead of a waterfall, we now have a succession of arches (if you order by gains first, then losses), powerlines (if losses are presented before gains), or zig-zags (if we didn’t organize our components at all).

Applications Of Waterfall Chart

  • A waterfall chart may be used for analysis, particularly to comprehend or explain the progressive transition in the quantitative value of an entity susceptible to increment or decrement. A waterfall or cascade chart is frequently used to demonstrate variations in income or profit between two time periods.
  • Waterfall charts may be used for a variety of quantitative analyses, including inventory and performance analysis.
  • Waterfall charts are also often used in financial analysis to show how a net value is calculated by accumulating profits and losses over time or by comparing actual and projected amounts. A waterfall chart can also depict changes in cash flows or income statement line items.

Consideration While Using A Waterfall Chart

Direct labelling: Bars with no zero base are difficult to comprehend. As a result, labelling the bars directly in a waterfall chart is beneficial.

Positive and negative values are represented by different colors: If it is critical to distinguish between positive and negative values, use this. However, be aware of your color selections.

Sort the bars: If the categories have no inherent order, it’s a good idea to sort the values for positive and negative values (smallest to biggest or largest to smallest).

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Types Of Waterfall Chart

There are several variations on the waterfall chart. While these versions may not be accurate representations of the widely recognized waterfall concept, they are quite useful in some scenarios.

The waterfall chart with numerous totals, as mentioned above, is the major version. It transforms the visual impact from a single cascade to several arcs; theoretically, it is still a waterfall chart, but the term is no longer totally recognizable.

There are charts that employ a similar visual effect, in which each succeeding point on the x-axis of a bar chart represents a net change rather than a cumulative total. This is sometimes used in a modified Pareto chart, as seen below.

A combination chart is the more frequent Pareto chart, in which a bar chart indicates the absolute quantity of each category, listed in decreasing order, and a line chart shows the cumulative percentage of the overall total covered by the current and all previous categories.

Pareto charts only include positive values, display categories that sum up to 100 percent of a total, and rank these categories in descending order of value along the x-axis. The goal is to demonstrate how few categories are required to achieve 80% of the total value when sorted in this manner. (According to the “Pareto principle,” sometimes known as the 80/20 rule, 80 percent of the effects in a system are linked to only 20 percent of the causes.)

Stock charts, which display the daily open, high, low, and close values for a specific security, are somewhat comparable but not exactly waterfall charts; they have more in common with box-and-whisker plots, albeit frequently showing component bars floating in space.

Advantages Of Waterfall Chart

  • Displaying modest variations in the quantitative value of something over time is effective.
  • It follows a logical framework.
  • The waterfall chart excels at its specialized purpose of displaying the constituent parts of a larger transformation.
  • When summary statistics aren’t doing a good job of communicating the whole story, having a specified mechanism to represent the composition of change between two points may be quite useful (which we might otherwise turn to line graph to show, while still maintaining a sense of quantity that a bar chart does a much better job of providing).

Disadvantages Of Waterfall Chart

  • Waterfall charts, by definition, encourage viewers to compare the lengths of objects floating in space. We can compare the lengths of lines when they have a similar baseline, but in a waterfall chart, very few of the bars do. As a result, comparing the particular sizes of growth or contraction across two subcategories is difficult. When communicating the particular values of component components, it is best to label those elements directly.
  • There’s also the issue that certain bars are designed to be read bottom-up (the baseline is at the bottom) and others top-down, depending on whether they show gains or losses. This is easy to counteract if we combine all of our earnings and losses together (ensuring that the chart retains a normal arched or bowed form); yet, if we have subcategories grouped in such a manner that gains and losses are interleaved, the insights we could obtain are more difficult to extract.
  • The desire to truncate your Y axis is a difficulty for the waterfall chart’s creator, and it is true whenever we need to present large and little data together. It’s not uncommon for waterfall chart “pillars” to show HUGE figures (for example, the current worth of our multinational company), but the component components reflecting a weekly or monthly shift are very tiny…. maybe 1% or less of the overall values.
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