Sankey Diagrams: An Insightful Visual Tool for Resource Flow and Financial Relationships in Finance
Financial institutions and analysts often seek efficient ways to understand and interpret complex financial relationships and the flow of resources within their organizations. Sankey diagrams, a powerful visual display tool, offer precisely this functionality. This article delves into the world of Sankey diagrams in finance, exploring their application, benefits, and a step-by-step guide to creating one.
Understanding the basics
To appreciate how Sankey diagrams can augment financial analysis, it is critical to understand their fundamental structure. A Sankey diagram visualizes the flow and direction of material, energy, or information through a process system. Each Sankey diagram consists of arrows, labeled with quantities, flowing between processes. The width of the arrows at any particular segment is proportional to the quantity (typically in percentage terms of the total flow).
In the context of finance, these diagrams can represent the flow of money between different processes, projects, departments, or entities within an organization, providing a holistic view of financial investments, loans, and other transactions.
Applying Sankey diagrams in finance
Finance professionals use Sankey diagrams in various ways:
1. **Tracking investment flows**: By mapping the distribution of funds across various departments, projects, or entities, Sankey diagrams offer an at-a-glance view of where resources are allocated.
2. **Identifying inefficiencies**: These diagrams can reveal points of high flow and resource concentration, which could indicate inefficiencies or areas of potential savings.
3. **Performance assessments**: Financial institutions can use Sankey diagrams to compare the performance of different business lines or units, highlighting areas of strength and those in need of improvement.
4. **Compliance review**: Regulatory requirements often dictate how resources must be allocated or spent. Sankey diagrams can help ensure compliance by visually verifying that financial flows adhere to these criteria.
5. **Communication and storytelling**: Sankey diagrams are an excellent method of conveying complex financial data to non-technical stakeholders through an easily understandable visual metaphor.
Creating your Sankey diagram
Here is a step-by-step guide to creating a Sankey diagram for financial data:
1. **Gather data**: Begin by collecting the financial data you wish to visualize. This could include revenue streams, expenditures, investment allocations, or other financial flows.
2. **Identify processes**: Outline the processes involved in your financial system. These should be steps in the flow of resources that can be observed or quantified.
3. **Set up the diagram**: Choose a template or drawing tool that supports Sankey diagrams, such as Microsoft Excel, Adobe Illustrator, or specialized diagramming software.
4. **Label the vertices**: Each vertex represents a process or entity involved in the diagram. Label these in a clear and concise manner to identify them easily.
5. **Draw the arrows**: Use arrows to visually represent the flow between vertices. The width of the arrows should reflect the percentage of total resource flow that each arrow represents.
6. **Format the diagram**: Apply appropriate formatting to each element for clarity and beauty. Include legends, scale labels, and any additional annotations necessary to convey the message.
7. **Review and iterate**: Once your diagram is complete, review it for accuracy and comprehensiveness. You may need to adjust the width of arrows or reposition elements to convey the intended information effectively.
8. **Share and communicate**: Once your Sankey diagram is ready, share it with stakeholders. The visual clarity of Sankey diagrams can facilitate discussions and help in making informed decisions.
Conclusion
Sankey diagrams stand as an invaluable tool for visualizing resource flow and financial relationships in the finance world. By capturing intricate and often complex data in an intuitive format, these diagrams enhance understanding and facilitate informed decision-making. Embracing this visual technique can position financial institutions and professionals to better manage resources, identify inefficiencies, and communicate their insights effectively.
