Waterfall Charts; September favorites

People, music, writing and some legendary Excel

A few favorite things - people, music, and writing, so much writing - from September, and then a reflection on a valuable reporting framework from years gone by that’s due for a resurgence.

• Recently we took our boys to see the movie Canary, about glaciologist Lonnie Thompson. We’ve been fortunate to know him ever since my wife and I joined an expedition to the Bona-Churchill ice field 20+ yrs ago for a profile - “The Vanishing World of Lonnie Thompson” - that Lolly wrote for National Geographic Adventure. While an inspiring and heroic character, the movie should have been better and shorter - as they all should be nowadays! Read Lolly’s profile or check out the great book about Lonnie by Mark Bowen, Thin Ice.

  

  Lonnie Thompson in the drilling tent on Bona-Churchill, AK (2004)

• After I saw this Pitchfork review of Jaimie Branch’s third and final album, I’ve been listening to her music for the first time. This record - Fly or Die Fly or Die Fly or Die ((world war)) - is “a heartbreaking glimpse of where she might have gone next” and full of joyful, “jubilant ensemble playing.”

• Such a boom of amazing writing these days, and yet never more difficult to discover new, relevant talents. My favorite solution: Every morning, The Sample sends me one article from a random newsletter that more or less lines up with my interests. When you get one you like, you can subscribe to the writer with one click. Sign up here.

Ok, onwards! Taking a different direction this week, with an overview of a reporting tool I found valuable that has all but vanished from startups today…

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The Power of the Waterfall Chart 

Nothing is forgotten faster than a missed forecast. Yet projecting results and comparing progress against past plans is one of the most effective ways to understand how a company works and improve its performance. 

Enter the waterfall chart - a simple but powerful framework you can use to make projections, and then compare your actual results over time against your initial plans and subsequent forecasts. 

We started using it in the early days at Propeller and it quickly became my favorite way to see how we were doing, where we might be getting off track, and what adjustments were needed. I still use waterfall charts for a variety of personal goals, and in director roles where I can build them from materials shared with the board.

Today, though, it’s rare to run across a company who’s even heard of a waterfall chart. I generally try to change that! It’s one of the first and most common recommendations I make to founders and their teams.

Here is a quick overview of the approach and some thoughts about its benefits:

A waterfall model is a sedimentary way of capturing projections over time. The top row represents the original Plan of Record for the goal. Actual results for the month of August are placed at the intersection of the August column and row. Subsequent months on that row display the new forecast you make at the end of each period. 

Here’s an example from venture capitalist Brian Ascher’s 2011 post, “The Single Best Financial Reporting Tool Ever,” which introduced me to the model

This arrangement forms a stair-step or waterfall shape, with actuals cascading diagonally. You can strengthen the visual message by shading the actuals surpassing the plan in green and those falling short in red. Cumulative totals and year-to-date figures can be added for clarity. 

The time period can vary with the chosen variable; just remember that you need results that are finalized within the prior period for the chart to work. 

Waterfall charts can be used to monitor a variety of goals. The target does not matter. It can be a financial metric like revenue or cash, or an operational one like headcount or enrolled patients. At various times, we used waterfall charts to track revenue, bookings, cash / burn, operating expenses, new customers, enrolled and retained patients, clinical outcomes, and upstream targets like marketing leads. You can build company-wide charts or specific ones for a given customer. 

Their visual nature makes things immediately evident. Few tools provide such a clear way to assess progress against goals. When a company starts to veer, it’s easy to spot in the chart and impossible not to acknowledge the drift. With a quick look you can answer key questions like: How is our performance against the original plan? What about against recent forecasts? Where is the probable outcome by fiscal year-end? Is our predictive accuracy improving? 

Waterfall charts create new views on your business. Nowhere else can you find an accumulated history of forecasts and your performance consolidated like this. They combine an aerial view of your performance with a dynamic map of your trajectory. That gives you nearly the animated perspective and insight one usually gets from a flip book, and makes it easier to envision the changes that lay ahead. 

Waterfall charts encourage intervention and build focus, energy and momentum around a plan. By continuously juxtaposing actuals against forecasts, they foster a culture of experimentation rather than analysis. The looming re-forecast provokes an invaluable shift in mindset. It motivates people to ditch the idea that they must first know the cause of something before they try to solve it. Instead they realize the need to launch a barrage of interventions against a problem to look for movement - to understand causes by testing solutions. 

Regular reviews improve your planning and forecasting. Each time you update the model you have an opportunity to re-calibrate based on what’s been learned. Those moments often prompt better questions about the business, which lead to sharper planning. Even with limited historical data, the regular, iterative refinement makes it possible to achieve increasingly accurate forecasts. You also get better at analyzing trends and foreseeing potential challenges and opportunities. And since plans are based on assumptions, waterfall models often highlight inaccurate ones. In our case, it challenged our unrealistic conclusions about the rate at which we’d be able to enroll patients from clinics. 

Waterfall charts are useful communication tools. They simplify complex data while adding historical context. Their combination of visual simplicity and depth of information means anyone can quickly grasp the company’s position relative to its goals, see whether your forecasts are becoming more precise, and understand where you’ll likely end up the year. The continuous updates create familiarity with the evolving picture of the business and reduce the likelihood of surprises. 

The time it takes to maintain the chart is its biggest drawback. Keeping it up requires a decent amount of effort, though that investment is more than returned by the number of unnecessary meetings and discussions it eliminates. We did occasionally have concerns about negative reactions to missed plans or forecasts, but timely updates help to minimize that risk and encourage rational and productive responses.

Waterfall charts are due for a comeback - go build one! Few things rival its ability to help a team track, forecast, and adjust its strategies. Perhaps Causal or another of the other emerging finance tools will introduce something like this. In the meantime, you can get started with a simple Excel version here.