Sankey diagrams, known for their unique style of visualizing the flow of material or energy, have been a staple in fields such as engineering, logistics, and environmental analysis. Now, modern finance is embracing this graphical tool, leveraging its distinctive design to make complex transactions transparent and intuitive. This article will serve as a visual guide to understanding the application of Sankey diagrams in the complex world of financial flows.
At their core, Sankey diagrams are essentially flowcharts turned on their side. With an arrowed flow direction from left to right, these diagrams depict the movement or conversion of goods, services, or currency. Each arrow’s width represents the quantity or value being transferred (or ‘flowed’) between nodes, which can signify any number of economic entities, sectors, or steps within a process.
### The Basics: Visualizing Finance with Sankey Diagrams
To utilize Sankey diagrams in finance, one typically follows this process:
**Identify Nodes:**
First, you establish the nodes or points of origin and destination for the money flow. These can include banks, individuals, companies, nations, or specific sectors within the economy.
**Choose the Axes:**
A Sankey diagram has a horizontal flow axis and a vertical direction of flow. The left side of the diagram typically indicates the source of money, while the right side indicates the ultimate use of money.
**Determine the Flow Quantities:**
The widths of the arrows you add between nodes will represent the volume, duration, or amount of the financial transaction being visualized. In finance, these might be measured in dollars, euros, or yen, depending on the currency being depicted.
**Apply Color Coding:**
Using different colors can differentiate various types of financial flows, like capital investment, domestic spending, or export, making each flow easily distinguishable.
### Common Types of Sankey Diagrams in Finance
1. **Cash Flow Sankey Diagrams:**
These are essential for tracking the movement of cash within an organization. They can show how assets and liabilities are structured and identify the direction and amount of cash in different accounts.
2. **Investment Sankey Diagrams:**
Investment diagrams can show where and how much money is being invested across various markets, sectors, or geographic regions. This helps in understanding the distribution and concentration of investment.
3. **Supply Chain Financial Analysis:**
Supply chain financiers use Sankey diagrams to track the flow of payment from the buyer to suppliers through to the final customer, providing a detailed accounting of capital flows within an extended corporate supply chain.
4. **Portfolio Flows Sankey Diagrams:**
Investors use these diagrams to monitor the inflow and outflow of their funding in different assets, such as equities, bonds, and commodities.
### Real World Applications
Financial services like asset managers, investment banks, and insurance companies can use Sankey diagrams to:
– Analyze and visualize the financial networks of major clients.
– Track the flow of investments throughout the supply chain and across market segments.
– Communicate the financial impacts of policies, regulations, and business decisions.
### Benefits of Using Sankey Diagrams in Finance
1. **Clarity and Simplicity:**
Sankey diagrams distill vast amounts of data into a clear and concise format that makes sense to non-technical audiences.
2. **Invisibility of Hidden Costs:**
They can make hidden or lost costs visible, prompting action to understand and manage these elements.
3. **Comparative Analysis:**
Sankey diagrams support comparison between different financial scenarios easily, aiding in decision-making.
4. **Policy and Regulation Impact Analysis:**
They can be instrumental in illustrating the financial implications of regulatory actions and policy changes.
### Conclusion
By integrating Sankey diagrams into financial decision-making, organizations can gain profound insights into their financial networks and processes. These diagrams have the power to elevate transparency, accountability, and strategic planning by visualizing monetary flows in an engaging, analytical manner. As the financial industry continues to evolve, so too will the uses of Sankey diagrams in enhancing our understanding of the movement of money and the complexities they represent.
