Definition
A Waterfall Chart in Excel is a data visualization tool that illustrates how an initial value is affected by a series of positive and negative changes. It’s often used in financial analysis to demonstrate the sequential impact of revenue and cost elements on the net income. The name “waterfall” comes from the way the bars on the chart appear to fall or rise towards an end total, resembling a waterfall.
Key Takeaways
- A Waterfall Chart in Excel is a special type of graph that helps visually represent the cumulative effect of sequentially introduced positive or negative values. These values can be time-based or category-based.
- Waterfall Charts are commonly used in corporate finance and other fields to illustrate how an initial value is increased and decreased by a series of intermediate values, leading to a final value. They can efficiently depict the breakdown structure of quantitative data, making it easier to understand.
- In Excel, creating a Waterfall Chart involves essentially formatting the data and adding a bit of error checking for values. Excel 2016 and later versions offer built-in options to create Waterfall Charts, while in earlier versions, they can be created manually by cleverly using stacked column charts.
Importance
A Waterfall chart in Excel is a visually powerful tool that is important in financial analysis because it effectively displays the cumulative effect of sequential positive or negative values. It works by showing how an initial value is increased and decreased by a series of intermediate values, leading to a final value.
This helps to display a clear picture of how start positions are affected by various factors, either positively or negatively. For instance, it’s instrumental in understanding revenue growth influenced by multiple variables like pricing, quantity, foreign exchange, etc.
Therefore, through this clarity, businesses can make informed strategic decisions. Its simplicity and ease of interpretation contribute to its importance in finance.
Explanation
Waterfall charts in Excel are a unique type of visual graphic used extensively in financial and business analysis to represent data. These charts illustrate the cumulative effect of sequentially introduced positive or negative values.
In simpler terms, they show how an initial value is affected by a series of intermediate positive or negative values. This makes waterfall charts very useful for understanding or explaining the gradual transition in the quantitative value of a variable whether it’s a stock, sales, accounting numbers, and so forth.
The primary purpose of a waterfall chart is to provide a clear and organized visual representation of how an initial value is impacted over time or due to several factors. These charts can be particularly handy when you are working with many data points.
For example, a waterfall chart can be used to visually demonstrate how net profit is broken down into its different components such as revenue, cost of sales, operating expenses, and taxes. These charts offer a comprehensive yet straightforward way to display complex financial data, making the understanding and interpretation of that data much more accessible and easier to digest.
Examples of Waterfall Chart in Excel
Sales Performance Analysis: A company can use a Waterfall Chart in Excel to illustrate monthly sales performances. It would show the beginning sales amount, the positive increments from each succeeding sales month, as well as downturns during periods of low sales. This gives the management a visual understanding of the sales flow over a specific period.
Budget Tracking: Waterfall Chart in Excel can also be used to track a department’s annual budget versus actuals. It starts with the full budgeted amount, then cascades down (or up) showing variances either as increases (positive variances) or decreases (negative variances). This helps to clearly identify where budget overspend or underspend occurred.
Cash Flow Analysis: A company can use Waterfall Chart in Excel to show the journey of its cash flow. It starts with the opening balance, then adds in sources of cash such as sales or asset disposals, and subtracts out uses of cash like costs and expenses. This visual representation can help businesses better understand the ins and outs of their cash flow.
FAQs for Waterfall Chart in Excel
1. What is a Waterfall Chart in Excel?
A Waterfall Chart, also known as a Bridge Chart, is used in Excel to visualize the cumulative effect of sequentially introduced positive or negative values. These values can either be time-based or category-based. The end result of the chart is a visual that looks similar to a waterfall, hence the name.
2. How to create a Waterfall Chart?
To create a Waterfall Chart, you need to start with a dataset. You then select the data and go to the “Insert” tab. In the chart options, you will find the “Waterfall” option under the “Stock” chart type. Click on it and your Waterfall Chart will be created.
3. Can you edit the colors of the bars in the Waterfall Chart?
Yes, it is possible to edit the colors of the bars in the chart. Just select the bar you want to edit, right click and choose “Format Data Point”. You will see an option to edit the fill color. You can pick any color you want for each bar, which allows for very personalized visualizations.
4. What are the advantages of using a Waterfall Chart?
Waterfall Charts provide a clear visualization of where increases and decreases have occurred, and give a quick sense of the magnitude of different contributing factors. They are also very useful for understanding the cumulative effect of a series of positive and negative values, as well as helping to explain the transition between two points in a clear and concise way.
5. Can a Waterfall Chart be used with any data?
A Waterfall Chart is very versatile and can work with a wide range of data. However, it is most useful when you want to visualize a starting value, the positive and negative changes made to that value, and the resulting end value. EP&L statements, cash flow, and inventory are common use cases.
Related Entrepreneurship Terms
- Excel Data Visualization
- Running Total Calculation
- Categorical Axis
- Series Data Points
- Chart Formulas
Sources for More Information
- Excel Easy – This website is great for Excel beginners and covers everything you need to know about creating a waterfall chart.
- Microsoft – As the company behind Excel, you can be sure that their tutorials and guides on how to create a waterfall chart are reliable and up to date.
- Vertex42 – This website offers professionally designed spreadsheet solutions that make Excel easier to use and more reliable to work with.
- ExtendOffice – The website provides tips and tricks that will help you become more efficient using Excel and make the most of its capabilities, including creating waterfall charts.
