3. Process-Oriented Financial Analysis

The Way [Tao] is that towards which all things flow.
Tao Te Ching, Chapter 62

Financial analysis in the twenty-first century will move from the study of static things towards the study of change and flow. This movement will follow the pattern of science as science became mathematically more sophisticated.

The ancient Greeks regarded science as a study of things. Things, in their most essential state, unaffected by changes that are temporary, were what the Greeks measured and wrote down for posterity. Stones and buildings were measured with a geometry that the Greeks became expert at and had an almost religious reverence for. Geometry, the mathematics of the Greeks, was a perfect tool for measuring things – things that were constant and unchanging.

Living things were grouped by the Greeks into species, families, and other categories according to their most essential characteristics. Just as the Pythagoreans revered geometry, Aristotle venerated categories, the catalogue of all of nature into groups.

In the same way that today’s financial information is given meaning by placing things (transactions) into categories (ledger accounts), Aristotle’s science was a primitive matter of placing everything in it proper category and then measuring the things found in those categories. For Aristotle, as it is for today’s modern financial analysis, there was no attempt to find cause and effect or correlations and indications; thins just have their proper category and follow the order that comes with those categories.

In science, however, the seventeenth century gave us Galileo Galilei, Isaac Newton, Gottfried Leibniz, and a revolution in science away from the study of change and towards the study of process. The product of this revolution was a major contributor to the modern industrial societies that we live in now. This same revolution is slowly occurring in the always conservative practice of financial record keeping (i.e. accounting and bookkeeping). The invention of the Cash Flow Statement in the 1970’s is the first major step in this direction. The use of data warehouses and more modern data analysis techniques with the computer now allow us to make financial analysis the dynamic study of movements, changes, processes, and the general flow of financial resources.

The coming years will bring us the merger of Business Intelligence (BI) and financial record-keeping into what will truly be “the language of business.” See p. 36, Banking the Past.

2. The Information Age

The logical instrument which Aristotle used for the analysis of actual fact into more abstract elements was that of classification into species and genera.
Alfred North Whitehead

Financial analysis is an information-based undertaking. It determines the value of a company by the data that measures the company’s assets, income, and cash flow. The quality of the financial analysis is a product of the quantity, quality, and timeliness of the information that is used in making the analysis. Better and more current information makes better financial analysis possible and leads to better investment decisions.

In the age of computers, the volume of data and the tools used to analyze data have grown enormously. Companies, both large and small, are now capable of generating huge amounts of data from automated cash registers and scanning devices and inexpensive databases are available that allow that data to be searched, selected, and summed into digestible morsels of wisdom. The future of financial analysis lies in the ability to analyze the large volumes of data that are now being produced by the ubiquitous personal computer. See The Tao of Financial Information.