What Is a Waterfall Chart Used for in the Business World?


 A natural waterfall in a forest

Graphically presenting data can be a challenging task, particularly when numeric values are involved. However, the business world has developed solutions like the waterfall chart to make these tasks manageable. What is a waterfall chart? Let’s dive into the concept further.

Understanding the Concept of a Waterfall Chart

To understand why businesses utilize waterfall charts, we first need to grasp their basic idea. A waterfall chart, also known as a bridge chart, visually represents how an initial value is affected by a series of intermediate negative and positive values. It’s a perfect choice when dealing with financial results because it shows how an initial value goes through changes and ends up in a final stage.

The name ‘waterfall’ comes from the chart’s depiction, which looks a bit like a waterfall. The chart’s bars can either be falling down (spending, losses, etc.) or rising above (gains, profits, etc.), resembling waterfalls.

Waterfall charts are good at demonstrating the cumulative effect of sequential positive and negative values. This indivisibility makes them beneficial for analyzing the gradual change that occurs over a period.

The Role of a Waterfall Chart in Monitoring Business Data

A waterfall chart plays a crucial role in monitoring data, as it provides an in-depth look into the performance of different business aspects. It becomes easier for executives and managers to pinpoint what factors are affecting profit, or driving costs and to see the impact of each factor.

By viewing a clear, sequential representation of data, businesses can make strategic decisions to improve performance. For example, if a business has severe cost drivers, a waterfall chart can make it clear where the issue is and lead to a more informed decision-making process.

Waterfall charts also simplify complicated data calculations. Business data often involves large and complex sets of numbers, and waterfall charts make it easier to understand all these elements’ impact and influence each other.

Impact of a Waterfall Chart in Financial Management

A businessman going over financial data

In financial management, a waterfall chart can have a significant influence. One of its main effects is facilitating a comprehensive understanding of revenues and costs. The chart’s vertical bars allow the tracking of incremental changes and provide clarity in terms of where profits or losses are coming from.

Also, the comprehensibility of waterfall charts makes them a popular choice for executives who want to highlight a business’s financial performance.

Waterfall charts also significantly contribute to business budgeting. Managers can use them to monitor different budget items and their impact on the total budget. The chart provides a visual depiction of each expenditure, enabling businesses to have a clearer understanding of their spending habits and patterns.

Real-World Applications of a Waterfall Chart in Business

Waterfall charts are versatile tools that are applicable in various business settings. For instance, in sales analysis, a waterfall chart can display how different regions, products, or salespersons contribute to the overall sales figure.

In addition, waterfall charts can also be used in project management to monitor the accumulation of tasks over time. This allows the management to take necessary actions to ensure that the project is completed within schedule. They help make balance sheets, income statements, and cash flow statements more understandable by graphically representing the various components.

Altogether, a waterfall chart is a versatile tool that plays a critical role in visual representation in various analytics departments of business. Its application in the real world ranges from project management and cost analysis to sales analysis and financial management.