Waterfall Charts Explained

A waterfall chart shows how a starting value becomes an ending value through a sequence of additions and subtractions — each floating bar picks up where the last one ended. It's the standard chart for explaining a change: revenue to net income, last year's headcount to this year's, budget to actual.

How Does a Waterfall Chart Work?

The first and last bars are anchored to zero (the start and end totals); every bar in between floats, starting at the previous bar's running total and moving up for gains or down for losses. Color codes the direction — typically green up, red down, gray for totals.

# Running totals for a simple P&L bridge:
# Revenue        +500   (starts at 0, ends at 500)
# COGS           -200   (starts at 500, ends at 300)
# Gross Profit    300   (anchored total)
# Opex           -180   (starts at 300, ends at 120)
# Tax             -30   (starts at 120, ends at 90)
# Net Income       90   (anchored total)

How Do You Build a Waterfall Chart (P&L Example)?

Plotly has a native waterfall trace; in matplotlib you fake it with bars whose bottoms are the running cumulative sum. The measure list marks which bars are floating deltas and which are anchored totals.

import plotly.graph_objects as go

fig = go.Figure(go.Waterfall(
    x=["Revenue", "COGS", "Gross Profit", "Opex", "Tax", "Net Income"],
    measure=["relative", "relative", "total",
             "relative", "relative", "total"],
    y=[500, -200, 0, -180, -30, 0],
))
fig.show()
# Bars step down from 500 to 90, totals anchored at zero

When Should You Use a Waterfall Instead of a Stacked Bar?

Use a waterfall when the story is a sequence of changes between two states, especially with a mix of positive and negative steps; use a stacked bar when the story is the composition of a single total. A stacked bar can't show subtractions at all — negative segments break the stack — while a waterfall handles them naturally.

Common Pitfalls

Most confusing waterfall charts have one of five problems: no subtotals to re-anchor on, colors that change meaning from bar to bar, too many small steps, bars in an illogical order, or floating bars with no data labels. Each one is quick to fix.

• No anchored subtotals: in a long bridge, add "total" bars (Gross Profit, EBITDA) so readers can re-anchor to the axis.
• Inconsistent sign colors: if red means "decrease," it must mean decrease in every bar — don't recolor by category.
• Too many tiny steps: more than ~10 bars turns the bridge into noise. Group small drivers into "Other."
• Unordered steps: order bars by logical flow (the P&L structure) or by impact size — not alphabetically.
• Missing data labels: floating bars are hard to read off the axis, so label each bar with its delta.