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’ organisations and operations.

Understanding Wu Xing

Wu Xing describes a process of the five elements 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.

Generating Cycle

1. Wood feeds Fire
2. Fire produces Earth (ash, lava)
3. Earth bears Metal (geological processes produce minerals)
4. Metal collects Water (water vapor condenses on metal)
5. Water nourishes Wood (water flows, plants, and other changes in the forest)

Originally applied to politics and science, Wu Xing now finds relevance in various fields, including Astrology, Medicine, Martial Arts, and Finance.

Wu Xing in Finance Operations

Wood: Financial Models & Goals

• Nature: Flexible and nurturing
• Role: Financial models, planning, forecasting, and budgeting lay the foundation for success in finance, promoting growth and vision.
• Systems: Corporate performance management (CPM) systems, FP&A
• Processes: Planning, Forecasting, Budgeting

Fire: Expenses

• Nature: Fast-consuming and rising
• Role: Company expenses drive the organization’s operations.
• Systems: Expense management solutions, Banks, Card spending solutions, SCM
• Processes: Accounts Payable, Payroll, Taxes, Employee Expenses

Earth: Central Operations (FinOps)

• Nature: Stable and supportive
• Role: Central operations are the bedrock of an organization’s financial infrastructure, balancing all other elements.
• Systems: ERP, Accounting solutions, MRP, HRIS, ITSM
• Processes: General Ledger, Fixed Assets, Payroll, Compliance

Metal: Revenue

• Nature: Strong and resilient
• Role: Revenue ensures financial stability and fosters investor relations.
• Systems: ERP, CRM
• Processes: Accounts Receivable, Investor Relations, Contracts Management

Water: Business Intelligence

• Nature: Adaptive and flowing
• Role: Business Intelligence represents the flow of information and insights, enabling informed decision-making.
• Systems: BI, ERP, Accounting solutions, FP&A
• Processes: Reporting, Data Processing, Controlling, KPIs

Enhancing Financial Teams

Understanding the nature of each element and its connections can reveal valuable insights about a company’s finance operations. Identifying imbalances and addressing issues in systems, processes, or data can enhance overall efficiency.

Enabling Cycles

• Business Needs: When business needs arise, expenses increase.
• Production: Spending enables the production of goods and services.
• Revenue: Products and services generate revenue.
• Growth: Revenue drives business growth.
• Goals: Growth allows the achievement of new goals.

Weakening Cycle

• Frequent Changes: Shifts in goals and models affect reporting and control.
• Compromised Reporting: Inaccurate reporting reduces income.
• Budget Constraints: Reduced income leads to budget cuts affecting operations.
• Operational Challenges: Inefficiency in operations impacts cost management.
• Cost Management: Poor cost management disrupts financial goals.

Controlling Cycle

• Wood Grasps Earth: Business goals guide central operations.
• Fire Melts Metal: Expenses influence revenue.
• Earth Contains Water: Central operations ensure accurate reporting.
• Metal Chops Wood: Revenue determines business goals.
• Water Dampens Fire: Effective reporting manages expenses.

These examples demonstrate 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 dynamic world 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.