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How to Use Analogies to Explain Finance Terms to Non-Finance People

Analogies make the complex simple.

For finance and accounting professionals we think the basics of accounting and business finance are simple. Have you ever had this thought when speaking to non-accounting people? “Accrual accounting makes total sense. Of course we want to match our revenues with expenses…..so basic!” But what we forget is that what is basic to us, is not basic to everyone. 

For example, if you’re working with an owner that has always believed cash is king, the argument to make the switch to accrual is going to need to be a lot stronger than, “it’s just basic accounting”.

This where analogies become so powerful. It’s been proven that we may use data and facts to guide our decisions but ultimately we make our decisions off emotions. A good analogy makes the unfamiliar familiar,  the un-relatable relatable and it stirs up emotion. 

In my corporate history, I have turned to analogy many many times. Whether it’s in a weekly team meeting explaining a change in the standard billing process or in the all company quarterly financial update, breaking down the complex into simple using analogies has proven to be incredibly effective.

Here’s an example. Every accountant has probably had A.C.T explained to them as the level of expectation regarding their work. And most managers explain the acronym as accurate, consistent & timely. Our work has to be all three. 

But this is why. If you need to get from Denver to Salt Lake City the first thing you’d probably look up is directions. But if your directions contain a mix of both driving and taking the bus (inconsistent), a number of street names that don’t exist (inaccurate) and you only get the directions 3 days after you’re supposed to arrive (untimely)….chances are slim you’ll ever actually make your destination and chances are even more slim that you’ll have the ability to plan your pit stops or hotel stays along the way well. 

Financial statements need to be accurate, consistent and timely to be effective in guiding your organization to make good decisions. 

Do you see how using an analogy to emphasize your message is an effective business communication skill? Great!

But here’s the million dollar question…how do we come up with analogies when we are not that creative?

I believe, like our bicep muscle and our forecasting muscle, the more we practice thinking through analogies the better we will become at creating them. It takes practice but here are a few concepts and types of analogies to help you get started.

The first analogy type I use and I hear frequently are synonyms. Basically when you hear the word “like” chances are good you are hearing an analogy type using synonyms. These analogies show how one thing is just like another.

When Steve Jobs needed to introduce the world to the ipod created to be significantly smaller than any other existing Mp3 player he didn’t explain that it also housed a 5G hard drive. No he introduced it as having 1000 songs in your pocket. Most people don’t resonate with what having a 5G hard drive means but can absolutely understand accessing so many of their favorite songs in their pocket.

I spent much of my career leveling up the financial literacy and acumen of managers, executives, and entrepreneurs and through that experience I’ve learned that financial statements are always better understood when explained using analogies.

Company = Living Tree

Income Statement = Fruit your Tree Produces

Balance Sheet = Rings in the Trunk that show Growth & Maturity

Cash Flow = Water, the life source of your tree

All three have very different purposes but they are all connected.

Or here’s another example of a financial metric using a synonym. Poor customer retention is like a constant revolving door or customers. It’s really hard to grow a business if you have as many customers leaving as you do coming. 

Another analogy type effective in business and financial communications is using objects and action. Think about the purpose of the concept you are explaining to find an analogy to make it familiar and relatable.

A few years back I wanted to help a rising management team understand basic financial literacy.  We knew creating a culture of financial transparency was important but sharing numbers without any training to help your team understand what the numbers mean is like giving my 5 year old her very first bike and expecting her to just ride it without any training on how. She’s pretty spirited, she’ll definitely try to figure it out. But it’s a lot easier with someone who knows how to use a bike showing her how.

So in order to explain the concepts of balance sheet items vs. P&L items I made the team all owners of a pistachio farm and had them think about what they would need to get their farm off ready to plant, grow and harvest pistachios. 

Helping them think through the use of a tractor vs. the use of fertilizer to explain what belongs on the balance sheet as an asset and what gets expensed on a profit & loss statement was much easier than giving them the official accounting definition.

As leaders in our organization it’s not enough to understand what the numbers mean, we must be able to communicate what we’re seeing effectively as well. The more we can make these relatable & familiar through the use of analogies the more our messages will resonate.

Find me on Instagram and shoot me a DM if you want to practice coming up with analogies! I’d love to brainstorm with you!

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June 27, 2022

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From Cookieprenuer to a C-Suite Financial Executive, Liz knows that living outside the box is possible and wants to empower others to know they can do the same.

Financial Executive. coach. Female leader + AAPI Encourager.