Waterfall Charts: A Complete Guide to Visualizing Change

When it comes to data visualization, showing the “in between” can be tricky. For example, a report might highlight revenue at the start and end of a quarter, but what happened during the time in between? Did sales surge in month two? Did unexpected costs eat into profits? A standard chart might show the start and end points, but it fails to explain the journey.

This is where the waterfall chart proves its value. It shows exactly how sequential positive and negative values affect a total. Whether you’re a financial analyst explaining budget variance or a project manager tracking inventory, this chart reveals the step-by-step changes that lead to your final result.

In this guide, we’ll walk through everything you need to know: What waterfall charts are, when to use them, design tips, and how to create them.

What is a waterfall chart?

A waterfall chart is a way to visualize data that reveals how a series of intermediate positive and negative values affect an initial value. The result is a final value representing the cumulative total.

Its distinct appearance, with floating columns sometimes called “flying bricks,” sets it apart from standard column charts. In a standard column chart, every bar starts from the x-axis (zero). In a waterfall chart, the first and last bars represent totals and connect to the axis, while intermediate bars “float” to show incremental changes. This visual format makes it easy to see which factors drove increases or decreases.

When (and why) to use a waterfall chart

Waterfall charts work best when the journey is as important as the destination. They’re designed to highlight the incremental contributions of different factors to a total.

Here are several scenarios where this chart type excels:

Financial analysis

This is the most common use case for the waterfall chart. Financial professionals use them to visualize:

• Profit and loss statements: Showing how revenue transforms into net income by deducting the cost of goods sold, operating expenses, taxes, and interest.
• Budget variance: Explaining the difference between budgeted spending and actual spending by highlighting specific line items that caused the deviation.
• Revenue bridges: Illustrating how revenue changed from last year to this year by breaking down price changes, volume changes, and currency impacts.

Human resources

HR departments track headcount changes over time. A waterfall chart can start with the employee count on January 1. Positive bars represent new hires, while negative bars represent attrition, like resignations or terminations. The final bar shows the headcount on December 31. This makes it easy to see if growth is driven by high hiring or low turnover.

Inventory management

Supply chain managers use these charts to audit stock levels. You start with opening inventory. You add production or purchases. You subtract sales and shrinkage from damaged or lost goods. The final bar represents the closing inventory. This visually presents the flow of goods clearly.

Sales pipeline

Sales leaders can analyze how a pipeline of potential deals evolved over a quarter. You start with the pipeline value at the beginning of the quarter. You add new opportunities found. You subtract lost deals and deals that were pushed to the next quarter. You might also subtract won deals to show the remaining open pipeline.

The core advantages

Why choose this over a simple table?

1. Speed to insight: A table requires mental math. A waterfall chart provides an instant visual cue. You see a big red bar and immediately know that specific factor caused a major drop.
2. Context: It places positive and negative contributions in context with one another. You can see if a massive gain in one area was completely wiped out by many small losses in others.
3. Narrative: It tells a story of change. It answers the question “What happened?” rather than just “What is the number?”

How waterfall charts work: the mechanics

Understanding the mechanics of a waterfall chart is essential for both reading and building them. The chart relies on a specific logic to render correctly.

The baseline

The chart typically reads from left to right. It begins with a baseline value. This is your starting point. It’s anchored to the x-axis.

The increments

Following the baseline, you have a series of floating columns. These represent the changes.

• Positive values: These bars extend upward from the top of the previous column. They’re often colored green or blue to signify growth or addition.
• Negative values: These bars extend downward from the top of the previous column. They’re often colored red or orange to signify reduction or loss.

The connectors

The best waterfall charts include subtle lines connecting the corners of the columns. These lines guide the eye from the end of one bar to the start of the next. They reinforce the idea that these values are connected sequentially.

The subtotals and totals

At the end of the sequence, and sometimes in the middle, you’ll have a total column. Like the initial baseline, this column is anchored to the x-axis. It represents the accumulated value of the start point plus all subsequent changes.

Data layout

To power this visualization, your data should be structured as a list of movements, not just a list of totals. You need a category label, like “Q1 Revenue,” and a value. The visualization tool must understand which values are totals and which are increments.

Types and variants

While the standard waterfall is the most common, several variants exist to suit different data stories.

Standard waterfall

This is the classic version described above. It moves horizontally from left to right. It’s best for time-based or categorical breakdowns where the sequence matters.

Stacked waterfall

In complex scenarios, a single step might be composed of multiple sub factors. A stacked waterfall breaks the floating bars into segments. For example, a “Cost of Goods Sold” negative bar could be split into “Materials” and “Labor.” This adds detail but can make the chart harder to read if overused.

The “bridge” chart

This is a specific application of the waterfall chart used to compare two distinct points in time or two scenarios. For example, comparing “2023 Actuals” to “2024 Forecast.” The first bar is 2023. The last bar is 2024. The middle bars are the specific reasons for the difference. This is the standard for variance analysis.

Horizontal waterfall

While rare, you can orient the chart vertically, with bars extending to the right. This functions like a bar chart but includes the breakdown mechanics. It’s useful if your category labels are very long and require more space than the x-axis allows.

Design best practices and pitfalls

A poorly designed waterfall chart can be more confusing than a spreadsheet. Follow these guidelines to ensure clarity.

Use distinct color coding

Color is functional here, not just decorative. You must distinguish between three types of columns:

1. Start and end totals: Use a neutral or dark color, like dark gray or dark blue.
2. Positive changes: Use a color associated with “good” or “increase,” like green.
3. Negative changes: Use a color associated with “bad” or “decrease,” like red.

If you’re designing for color blind accessibility, consider using blue for positive and orange for negative, rather than green and red.

Manage your increments

Don’t include too many categories. A waterfall chart with 30 small steps looks like a jagged staircase and is difficult to interpret. If you have many small contributors, group them into a category labeled “Other.” Aim for 10 to 15 columns maximum.

Label clearly

Data labels are crucial. People shouldn’t have to guess the value of a floating bar by tracing it back to the y-axis. Place the numerical value directly on or above the bar. Make sure your category labels on the x-axis are readable and not overlapping.

Scale the axis appropriately

Normally, charts should start at zero. However, if your starting value is 1,000,000 and your changes are in the 100s, the changes will be invisible. In these cases, you might break the axis, but be very careful. It’s usually better to keep the zero baseline to maintain truthful proportions.

Avoid non-cumulative data

Don’t use a waterfall chart for data that doesn’t logically accumulate. For example, comparing the population of five different cities doesn’t work in a waterfall format because City A plus City B doesn’t equal City C.

Examples and storytelling tips

To truly master this chart, you must learn to tell a story with it. Let’s look at a practical example.

Scenario: A retail company wants to explain why its net income is lower than its gross revenue.

The data:

• Gross revenue: $100,000
• Returns: -$5,000
• Cost of goods: -$40,000
• Operating expenses: -$20,000
• Taxes: -$10,000
• Net income: $25,000

The chart narrative:

1. Anchor: The chart begins with a tall blue bar on the left representing the $100,000 “Gross Revenue.” This sets the scale.
2. Erosion: Next, we see a small red bar floating slightly lower. This is “Returns.” It brings the visual level down to $95,000.
3. Major drop: A large red bar drops down significantly. This is “Cost of Goods.” We’re now visually at the halfway mark.
4. Further deductions: Two more red steps follow for operating expenses and taxes.
5. The result: The final bar is blue and anchored to the bottom axis. It sits at the $25,000 mark.

Storytelling tip: When presenting this, don’t just read the numbers. Rather, narrate the flow. “We started the year strong with $100k in revenue. However, you can see that the cost of goods was the significant driver in reducing our margins, taking out 40 percent of our top line.”

How to create a waterfall chart

Modern spreadsheet tools make creating these charts much easier than in the past. While business intelligence platforms like Domo automate this process, you can build an effective waterfall chart right within Excel.

Excel (modern versions 2016+)

Modern Excel has a built-in waterfall chart type.

1. Prepare data: Create two columns. Column A for categories (e.g., Start, Revenue, Cost, End). Column B for values. Keep costs and deductions as negative numbers.
2. Insert chart: Highlight your data. Go to the Insert tab. Click the “Insert Waterfall, Funnel, Stock, Surface or Radar Chart” icon and select Waterfall.
3. Set totals: By default, Excel floats all bars. You must tell it which bars are totals. Click on the “End” bar once to select the entire series, then click it again to select just that bar. Right-click and choose Set as Total. Repeat this for your start value and any other subtotals.

Limitations and when to use an alternative

Despite their utility, waterfall charts aren’t always the right choice. There are times when they might mislead or confuse the audience.

Complexity overload

‍If you have more than 15 variables affecting a total, a waterfall chart becomes unreadable. In this case, a simple table with a summary is more effective.

Comparison limitations

‍Waterfalls are great for analyzing a single sequence. They’re poor at comparing multiple sequences. If you want to compare the profit and loss breakdowns of five different competitors, five side-by-side waterfall charts will look chaotic. A stacked bar chart is better for that specific comparison.

Volatility masking

‍A waterfall chart usually summarizes data over a period. It shows the net change. It doesn’t show the volatility during that period. If a stock price went up and down wildly but ended only slightly higher, the waterfall shows a small green bar. It hides the risk that occurred in the interim. A line chart is superior for showing trends and volatility over time.

Conclusion

The waterfall chart is an essential tool in the arsenal of any data storyteller. It solves the specific problem of visualizing how we get from a starting position to an ending position. By breaking down the components of change, it brings transparency to financial reports, inventory audits, and project updates.

To use them effectively, remember to keep the design clean. Use intuitive colors to signal growth and reduction. Limit the number of steps to avoid clutter. Most importantly, confirm your data supports the “part-to-whole” logic that the chart requires.

When you move beyond simple totals and start showing the drivers of those totals, you move from simply reporting data to providing true business intelligence.