Sankey diagrams have become an indispensable tool in finance, offering a visually intuitive method of tracking capital flows and economic relationships. By utilizing a flow chart-like structure, Sankey diagrams allow financial analysts, investors, and policymakers to understand how money moves through complex systems, providing a clearer picture than traditional bar or line charts might.
### The Basics of Sankey Diagrams
At their core, Sankey diagrams are flow-oriented charts that display a process’ energy or material inputs and outflows at various points to illustrate how things flow through the system. Horizontal bars represent the processes, with arrows indicating the direction and magnitude of the flow. The width of an arrow shows the amount being transmitted, with thicker arrows symbolizing larger flows and vice versa. The flow diagram’s width is typically smaller near the endpoints and larger in the middle, reflecting the direction of flow.
### Sankey Diagrams in Finance
Finance specifically benefits from the nuanced representation that Sankey diagrams provide due to the complexity of capital flows and interdependencies.
#### 1. Tracking Capital Flows
Sankey diagrams are excellent for visualizing the complex interplay of capital as it moves through various markets, sectors, and companies. They can depict flows between financial institutions, investment vehicles, and investment channels, helping to identify potential bottlenecks, inefficiencies, or areas of risk and opportunity.
For example, a simple Sankey diagram could show the money supply’s flow from the central bank to banks, then on to the broader economy, highlighting where the largest concentrations of funds are occurring, or where liquidity may be scarce.
#### 2. Understanding Economic Relationships
These diagrams are also powerful for demonstrating the relationships between economic components, illustrating the connections between different financial institutions, sectors, and countries. For instance, they can map the international investment relationships, such as foreign direct investment (FDI) and portfolio flows, illustrating who is investing where and the magnitude of those investments.
#### 3. Analyzing Efficiency and Carbon Footprints
In addition to capital tracking, Sankey diagrams have wider applications in assessing business performance and sustainability. They are particularly helpful in analyzing resource allocation within a company or the supply chain of a product, thus highlighting energy efficiency and carbon footprints.
In finance, they can represent the capital intensity of businesses, the efficiency of financial instruments, or the environmental impact of an investment strategy, giving a holistic view of a company’s or an investment’s sustainability.
#### 4. Investment Decisions
Investors use Sankey diagrams to identify investment opportunities and risks by visualizing the potential spread of their capital across different assets. For example, they can analyze how their investments could flow from bond markets into other market sectors through indices or mutual funds, giving them insights that might not be obvious from static balance sheets or income statements.
#### 5. Regulatory Compliance
Financial institutions often need to ensure compliance with regulations regarding capital flow and transparency. Sankey diagrams enable them to demonstrate the legality and integrity of their operations, providing a clear trail of where and how capital is moving in alignment with regulatory requirements.
### Tools and Software
Creating Sankey diagrams has become easier with the advent of specialized software such as sankey.js, PySankey, and Gephi. Finance professionals, students, and academics can now produce detailed Sankey diagrams by hand or using these tools, which can be embedded in documents, web pages, or slides to enhance transparency and understanding.
### Conclusion
In a world where finance is becoming ever more complex, Sankey diagrams offer a clear path to comprehension. They break down information silos by visualizing the intricate networks and flows of capital. With such diagrams, decision-makers across finance can identify patterns, opportunities, and risks, making them a vital tool for anyone seeking to navigate the increasingly intricate economic landscape.
