Achieving Finance Operation Equilibrium: Exploring the Wuxing Analogy in Finance

Finding balance and harmony is essential for success in finance operations and transformation, where systems, processes, data, and people intertwine. Drawing inspiration from ancient wisdom, I explore the fascinating parallels between the ancient Chinese concept of Wu Xing and the flows in the Finance departments’ organizations and operations.

I need to give you a few words about Wu Xing so that you can understand the parallels:

Wu Xing describes a process of the five that are always moving onward. It includes all areas of human existence. Wu Xing arose from the observation that five basic phases/moves can characterize all phenomena. The five phases/moves are fire, earth, metal, water, and wood. Traditionally, the five phases/moves are connected in two cycles of interactions: a generating or creation cycle and an overcoming or destructive cycle. Cycles and connections between phases/moves are the key to understanding the concept.

Please find an example below an example of the generating cycle:

The generating cycle is:

• Wood feeds Fire
• Fire produces Earth (ash, lava)
• Earth bears Metal (geological processes produce minerals)
• Metal collects Water (water vapor condenses on metal, for example)
• Water nourishes Wood (Water flowers, plants, and other changes in the forest)

This is a very simple explanation to describe the concept. When the concept was developed, it was applied more to politics and science, and later, it started to be used in Astrology, Medicine, Martial Arts, and many other areas.

So what is common between Finance operations and Wu Xing’s concept?

Let’s build parallels.

Wood: Financial Models & Goals

It is defined by its ability to bend and be flexible.

Financial models, planning, forecasting, and budgeting lay the foundation for success in finance. Just as wood nurtures life, these processes cultivate growth and vision.

Financial systems:?Corporate performance management (CPM) systems, FP&A

Processes:?Planning, Forecasting, Budgeting, etc.

Fire: Expenses

• It rises and heats up, and it is a fast-consuming energy.
• Company expenses are like the fiery force that keeps an organization’s engine running.
• Systems: Expense management solutions, Banks, Card spending solutions, SCM, etc.
• Processes: Accounts Payable, Payroll, Taxes, Employees Expenses, etc.

Earth: Central Operations (FinOps)

• Central operations are the bedrock of an organization’s financial infrastructure that balances all other stages/moves, much like the Earth element widely known for its central position that unites yin and yang.
• Just as Earth supports life, central operations support the organization’s financial health.
• Systems: ERP, Accounting solutions, MRP, HRIS, ITSM, etc.
• Processes: General Ledger, Fixed Assets, Payroll, Compliance, etc.

Metal: Revenue

• The Metal element symbolizes revenue and financial resilience.
• Like metal’s strength, revenue forges a path to financial stability and investor relations.
• Systems: ERP, CRM, etc.
• Processes: Accounts Receivable, Investor relations, Contracts management, etc.

Water: Business Intelligence

• Water represents the flow of information, insights, and control in finance. As water adapts to its environment, the management team analyzes the data to make wise decisions and confidently navigate financial waters.
• Systems: BI, ERP, Accounting solutions, FP&A, etc.
• Processes: Reporting, Data processing, Controlling, KPIs, etc.

How can it help financial teams to become better versions of themselves?

Understanding the nature of each phase/move and how it is connected and interconnected with others can uncover important and valuable information about the finance operations of any company. It can tell where an imbalance is, what processes are broken, what systems are not performing well, the loss of data and accuracy, and many more.

Let me explain this by providing visual images. Then many things will become clear to you.

The first image is about?Enabling, and you can see how each stage/move enables another stage/move and form a circle.

Enabling cycles:

1. When business needs arise, expenses go up;
2. By spending company can produce products & services;
3. Produced products & services allow the company to get revenue;
4. Revenue drives business growth;
5. Growth allows the company to achieve new goals;

The second cycle, Weakening, is reversed for the enabling cycle.

Weakening cycle:

1. Frequent changes in goals and models can lead to shifts in reporting and control requirements;
2. Inaccurate or compromised reporting and control mechanisms may lead to reduced income;
3. A reduction in income may lead to budgetary constraints or cost-cutting measures that impact central operations etc.
4. Reduced efficiency in central operations can lead to challenges in managing company expenses and controlling costs.
5. Over-expenses or difficulties in managing the costs ruin the goals and financial models.

Another type of connection is presented in the Controlling cycle.

Controlling cycle:

1. Wood grasps Earth. Business goals and financial models guide central operations activities;
2. Fire melts Metal. It costs money to make money. Expenses influence revenue;
3. Earth contains Water. Well-maintained central operations provide accurate data for reporting and control mechanisms;
4. Metal chops Wood. Revenue determines the goals and actions the company will select;
5. Water dampens Fire. Effective reporting and control mechanisms help manage company expenses;

There are only three examples of how the finance organization in each company can be analyzed. More importantly, the connection of each phase/move in companies represented by Finance Systems, Finance Processes, Finance Data, and People.

One of the beauties of such an approach is that if you understand that you have a disbalance in one of the stages/moves, you can analyze it to understand the cause and then take action to balance it.

Before companies think about financial transformation by using AI, ML, RPA, GenAI, and other trending technologies,?they must find balance in their finance organization?and only then move towards new technologies implementations.

Achieving Finance Operation Equilibrium

In the dance of finance, the Wu Xing analogy offers a unique perspective on achieving equilibrium. Each element plays a crucial role, contributing to the intricate choreography of financial processes. As we harness the energies of Wood’s vision, Fire’s efficiency, Earth’s stability, Metal’s resilience, and Water’s insights, we find ourselves better equipped to navigate the dynamic world of finance transformation.

Embrace the wisdom of the Five Elements and let them guide your financial journey toward balance and prosperity. Just as ancient philosophers understood the harmonious interplay of nature’s forces, we too can draw inspiration from this age-old concept to harmonize our financial operations and pave the way for a successful future.