A typical waterfall chart is used to show how an initial value is increased and decreased by a series of intermediate values, leading to a final value.
Let's take a simple example to understand things better. The simplest example would be an inventory audit of men's t-shirts in a retail outlet. You need to find out how many salable t-shirts you have in hand to start the next month with. Typically, there will be some units in stock to start the month with. Along the course of the t-shirt being on display and various people trying it out, some of the units will get damaged. Some of these damaged units could be refurbished to add to the stock, and finally we arrive at the number of salable units.
So in this waterfall chart, the initial value of “Units in stock” goes through a series of ups and downs, one up and one down to be precise to get to the final value of Salable Units.
Variants of the waterfall chart
The waterfall chart has a number of variants. While these variants might not do justice to the definition of the waterfall chart, but they come in very handy in some situations.
Let's consider the situation in which you need to plot your company's annual profit. So you will show your various sources of revenue, add them up and deduct all your costs to arrive at the total profit (or loss).
Another minor variant of the waterfall chart is possible wherein you show intermediate sums along the way before showing the final cumulative sum. In the example above, we could show intermediate sums for total revenue and total costs before showing the total profit.
The intermediate sum comes very useful when there is a lot of data to sum up much before the final value in the chart. For example, instead of Product Revenue if we were to show revenues from Web-based products and Desktop-based products separately; and similarly Customization Service and Support instead of Services as a whole, the Total Revenue sum would have been particularly useful over there.
Where can waterfall charts be used?
Now that you have got a hang of the waterfall chart, let's take a look at some other places where the waterfall chart can be used effectively.
- How many contracts do you have in hand at the start of a year? If you are from the construction or the legal department, you will surely identify with this. Start off with the number of contracts carried forward from the previous year, add to that new contracts you earned during that year and then reduce the contracts cancelled and the tasks accomplished. Finally, you reach the number of contracts in hand at the end of the year.
- How much did you score in an exam? So you took the GRE. Wouldn't you like to see how many questions you answered correctly in the verbal section and how many you answered wrong? Ditto for the quantitative section as well. And you add the two of them up to get to your final score.
See more examples of the waterfall chart here