When Waterfall Charts Are The Best Option For Data Visualization Reporting

Have you ever used a waterfall chart in your visualizations? Well, you should! From tracking profit and loss in financial reporting to understanding the impact of marketing channels, different industries are taking notice of the benefits of leveraging waterfall charts. By the end of this blog, you will too. First, you need to understand what they are and why they matter.

What is a waterfall chart, and why does it matter?

‍A waterfall chart, also called a bridge or cascade chart, is a visualization that shows a variable or statistic that goes through both positive and negative changes with distinct structural features: 

• The first and last bar of the chart have the same baseline (this is often zero, but it doesn’t have to be), which is the bottom of the y-axis. These two bars, the total sums, are determined as the two points of interest total, such as Q1 headcount to Q2 headcount or net sales to net income.
• The rest of the bars (known as intermediate steps or delta bars) have a baseline of the previous bar, which results in them floating through the duration of the chart. 

These features result in a visualization that looks like a staircase in the middle and cascades downward like a waterfall into the final sum. It can also be interpreted as a bridge propped up by supports on either side. If the different names for this visualization proclaim anything, the interpretation is undoubtedly in the beholder.

Beyond the function of the waterfall chart, its goal is to show the change in composition over time. Your chart should answer the question, “How did X change Y between points A and B?” The waterfall chart can be considered a combination of a pie chart, which focuses on the composition of the parts-to-whole relationship, and a line chart, focusing on change over time.

To interpret waterfall charts correctly, you’ll want to pay attention to the bars' size, direction, and color. Bar size represents the magnitude of each change, with larger bars indicating more significant impacts on the overall value. 

Bar colors typically follow a consistent scheme: increases appear in green or blue, with decreases in red. The position of each bar shows how it relates to the previous value, with gaps between bars highlighting the sequential nature of the changes. Now that we know what a waterfall chart is and its purpose, it’s time to see it in action.

Why use a waterfall chart? A bridge construction story

Consider a $10M bridge project that ended up costing $9.6M. Here's how different visualizations tell the story:

The waterfall chart reveals the journey: 

• Starting Point: $10.0M (Initial Budget)
• -$4.2M (Fixed Costs)
• -$3.1M (Labor)
• -$2.8M (Materials)

• $1.3M (Cost Savings)

• -$0.8M (Unexpected Issues) = 0.4M (Budget Surplus)

While the project closed at $0.4M under budget, the team found $1.3M in savings to help offset $0.8M in unexpected costs to get there. Without the waterfall chart, this success story in cost management would be largely invisible. Let’s see how the bar chart and pie chart display this.

Where the other charts may fall short for data visualization

Traditional visualizations struggle to tell this story effectively. Bar charts can't show cumulative effects or how each element builds upon the last. When cost savings appear as just another bar, you lose the understanding that these savings offset unexpected costs. 

Pie charts are even more limiting. They can't show negative values, hide the sequence of events, and lose the relationship between the initial budget and final costs entirely.

Where the waterfall chart wins

The waterfall chart's strength lies in showing both sequence and impact. When we see that $1.3M in savings came before the unexpected issues, we understand the project team's effectiveness at cost management. This timing is lost in other charts. 

This is how waterfall charts excel at telling the whole story: they reveal where you started, ended, and how you got there. 

These charts offer many different ways to tell the story. Let’s see how waterfall charts can vary in their creation and storytelling methods.

One chart, many faces: Variants of waterfall charts

Cascade chart

A cascade chart is like a waterfall chart with checkpoints. It includes subtotal bars throughout the sequence, providing helpful checkpoints during complex analyses. Perfect for financial statements that need interim totals like EBITDA before reaching net income.

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Gap waterfall chart

This variant visually compares actual vs targets, using distinct colors or patterns to highlight shortfalls or surpluses.

Movement waterfall chart

This variant explains changes between periods, using arrows or distinctive bars to show the total shift while breaking down contributing factors.

Build-up waterfall chart

Popular in consulting presentations, this variant shows how individual components combine to create a total. It contains clear labeling and callouts, organized into logical groups above or below each bar.

Each variant serves a specific analytical purpose:

• Cascade charts for complex sequences needing interim totals
• Gap charts for performance against targets
• Movement charts for understanding change drivers
• Build-up charts for component analysis with detailed annotations

Choose your variant based on whether your primary goal is to show progress checkpoints, target comparisons, change analysis, or detailed component breakdowns.

When to use waterfall charts (and why they’re powerful)

The perfect use case: Change

Waterfall charts are ideal when you need to tell a story about change. Whether you're tracking quarterly revenue changes, breaking down the journey from gross sales to net income, or analyzing project costs, these charts are powerful when you must show the bigger picture and how you got there.

Why waterfall charts work so well

Waterfall charts effectively communicate complex changes through intuitive design. Their left-to-right progression matches English reading patterns, starting with a clear baseline and showing how each change contributes to the final result. 

Color-coding (like green for increases and red for decreases) instantly communicates the nature of changes, while connecting lines show relationships between elements.

Key strengths include:

• Showing both absolute values and relative impact
• Maintaining clarity with multiple data points
• Supporting different levels of analysis
• Providing space for explanatory annotations

This design makes waterfall charts particularly valuable when understanding the "how" is as important as the "what." However, they aren't always the best choice for every need.

Waterfall charts aren’t always the answer. Here’s why.

There are many instances where waterfall charts aren’t going to best showcase the data “story” that you want to tell to your audience.

Use the right tool for the job

Recognizing when another visualization is more appropriate depends on your use case, the story you're trying to convey, and your audience. 

The goal is clear communication, not showcasing fancy visualization techniques. Sometimes, a simple bar or line chart might be exactly what your data needs to shine.

Key waterfall chart limitations

Comparison challenges

One of the greatest drawbacks of waterfall charts is their struggle with comparisons. Comparing the relative size of changes across different segments is difficult without a common baseline. 

For instance, while marketing and material costs increased, determining which had a more significant impact often requires closer examination.

Avoid parallel processes

Waterfall charts falter when depicting parallel processes. If multiple factors influence your outcome simultaneously, the forced sequential nature of a waterfall chart may obscure rather than clarify these relationships. In such cases, a parallel coordinate plot or multi-axis chart may better serve your needs.

Forecasting limitations

Waterfall charts are poor predictors of the future. They're inherently retrospective, showing how you got from A to B. 

But if you need to illustrate potential future scenarios or trends, you might be better served by trend lines or predictive visualizations.

Waterfall chart design challenges

Waterfall charts can be tricky to design effectively. When dealing with large initial values and minor changes, designers often face the temptation to truncate the y-axis, significantly impacting the story. They may have too many bars or categories, making the chart cluttered and confusing. 

Another common mistake is using inconsistent or misleading scales or colors, which can distort the perception of value changes. Additionally, failing to provide clear labels or context for each step can leave the audience struggling to follow the narrative. 

You will improve with these design choices through practice, but being mindful of these pitfalls will help you recognize when a waterfall chart may not be the best choice.

Audience considerations for proper visualizations

Waterfall charts are standard in corporate finance and project management but may puzzle audiences outside these industries. If your audience isn't familiar with this visualization type, you might spend more time explaining the chart format than discussing its insights. 

For example, the delta bars' alternating reading pattern (sometimes top-down, sometimes bottom-up) can confuse unfamiliar viewers.

From good to great: Building clear and impactful waterfalls

Here are some of the ways to make a big splash with your waterfall charts:

The art of clear communication

Creating an effective waterfall chart is about crafting a visual story that your audience can grasp within seconds. The goal is to present information and guide viewers to specific insights and conclusions.

Design fundamentals

Great chart design is just as crucial as the type of visualization you decide to use.

Thoughtful color selection

Colors should serve a purpose. Use them strategically to distinguish positive and negative changes, group-related elements, and draw attention to key insights. 

Maintaining consistency in your color choices throughout the narrative is equally important. A focused palette of 2-3 colors communicates more effectively than a rainbow of options. Simple truly is powerful.

Provide labels that guide

Clear labeling transforms a good waterfall chart into a great one. Every element should be immediately understandable:

• Use bold text for key takeaways
• Keep labels consistent in style and positioning
• Include a built-in legend that explains any color-coding
• Add concise footnotes for necessary context or methodology

Use smart scale choices

While starting axes at zero is generally good practice, waterfall charts sometimes benefit from a thoughtfully chosen scale highlighting important changes. The goal is transparency, and if you adjust the scale, make it evident through clear labeling and annotations.

“Beyond the bars” of everyday charts

The most effective waterfall charts go beyond the bars to include thoughtful supporting elements. Titles should be clear and action-oriented, stating the key takeaway upfront. 

Use contextual annotations to guide interpretation, and employ white space strategically to avoid visual clutter. 

Reference lines or benchmarks can add further clarity, and providing sources or footnotes enhances credibility.

Refining your approach: Data preparation and tool choice

Here’s what you need to prepare to create waterfall charts that are not only accurate, but also eye-catching.

Understanding your data needs

A powerful waterfall chart starts with the right kind of data, such as demonstrating how revenue is distributed across regions or tracking the progression of project costs from initial estimates to actual expenditures. The key is having measurable changes that connect your starting and ending points.

Waterfall data preparation essentials

A strong baseline serves as the anchor for your waterfall chart. From there, organize your data to highlight how each change impacts the starting point. Including categorized changes, descriptive labels, and running totals ensures the flow is intuitive. 

It’s also important to simplify complex datasets, grouping related items into logical categories to reduce clutter and prioritize the most significant drivers of change. More minor changes can be grouped into an "Other" category, helping you focus attention on the most impactful data points without sacrificing clarity.

When selecting a platform for creating waterfall charts, look for flexibility and ease of use. For instance, Sigma’s custom calculations make running totals effortless, while its interactive features allow for deeper data exploration.

In addition, modern visualization tools allow you to add interactive elements that enhance understanding:

• Hover tooltips with detailed information
• Click-through capabilities for drill-down analysis
• Dynamic filtering options
• Responsive design for different screen sizes

The goal is to create a beautiful and functional visualization. Each design choice should serve your core message, making it easier for your audience to grasp the story behind the numbers.

Streams of insight: Final takeaways on waterfall charts

Waterfall charts have proven they're far more than just another way to show data. Finance teams rely on them to tell complex fiscal stories. Marketing departments leverage them to break down campaign performance. 

The magic of waterfall charts lies in their ability to bridge the gap between "what happened" and "how it happened." They transform raw numbers into clear narratives that resonate with audiences, with each bar adding another chapter to the story.

However, they have limitations. Sometimes, a simple bar chart is a better choice. Understanding these constraints makes you better at leveraging waterfall charts where they are needed most.

So, the next time you explain how you got from point A to point B, consider the waterfall chart. Your data has a story to tell. Let it flow.