Tips tricks for excel based financial modeling, volume i

Clicking on the small arrow in the lower right hand corner of Font shows the Format Cells dropdown menu.. This can also be done through the Format Cells dropdown menu, which appears on c

Tips & Tricks for

Excel-Based Financial Modeling

Tips & Tricks for

Excel-Based Financial Modeling

A Must for Engineers & Financial Analysts

Volume I

M A Mian, PE

Tips & Tricks for Excel-Based Financial Modeling: A Must for Engineers & Financial Analysts, Volume I

Copyright © Business Expert Press, LLC, 2017

All rights reserved No part of this publication may be

reproduced, stored in a retrieval system, or transmitted in anyform or by any means—electronic, mechanical, photocopy,recording, or any other except for brief quotations, not to

exceed 400 words, without the prior permission of the

publisher

First published in 2017 by

Business Expert Press, LLC

222 East 46th Street, New York, NY 10017

Collection ISSN: 2331-0049 (print)

Collection ISSN: 2331-0057 (electronic)

Cover and interior design by Exeter Premedia Services PrivateLtd., Chennai, India

First edition: 2017

10 9 8 7 6 5 4 3 2 1

Printed in the United States of America

The purpose of this work is to show some advanced conceptsrelated to Excel based financial modeling Microsoft ExcelTM is avery powerful tool and most of the time we do not utilize its fullpotential Although not very difficult to use but it needs practiceand continuously striving to use the full potential of Excel Ofcourse, any advanced concepts require the basic knowledge whichmost of us have and then build on it It is only by hands-onexperimentation that one learns the art of constructing an efficientworksheet It is hoped that the examples herein will aid the reader

to develop his or her own worksheets using advanced concepts.The biggest advantage of Excel is that it is not a black box,especially if you have built the model yourself rather than workingwith somebody else’s model The basic requirement for mostfinancial modeling is to keep them simple so anyone can look at itcan easily figure out how most of the calculations are performed.The two volumes of this book cover dynamic charting, macros,goal seek, solver, the routine Excel functions commonly used, thelesser known Excel functions, the Excel’s financial functions, and

so on The introduction of macros in these books is not exhaustivebut the purpose of what is presented is to show you the power ofExcel, and it can be utilized to automate most repetitivecalculations at a click of a button

For those who use Excel on a daily basis in financial modelingand project/investment evaluations, this book is a must It contains

a wealth of practical examples, tips, new techniques all designed tohelp quickly exploit and master Excel to its full advantage andtherefore use spreadsheets more effectively in your jobs

Keywords

advance Excel, Excel based financial modeling, financial modeling,investment evaluation, investment evaluation modeling, MicrosoftExcelTM, project economics

The book is about utilizing full potential of Microsoft Excel infinancial modeling and other technical fields Simple, intuitive,step-by-step instructions reinforce theoretical intuition whileteaching mechanics of the model building process The author useshis 35 years of experience in writing this book and therefore itintroduces the most practical and direct approach to mastering theExcel-based financial modeling.

The book teaches students and professionals how to build,analyze, interpret, and present financial models in a step-by-stepfashion at their own pace A case study format is used to make surethe recipients can comprehend the real life modeling challenges.The book bridges the gap between academics and the real world toequip recipients with the practical financial skill set that they willneed on the job

The book starts with introducing the basic financial and otherroutinely usable functions of Excel, how to correctly use thesefunctions, what are the limitations of these functions, how toovercome these limitations, and so on The book then grills intohow to incorporate these functions into the context of a completeeconomics or financial model Finally, it provides opportunity tohelp users interpret the outcome of the models

The book will not only help in exploring the most advancedfeatures of Excel, it will also help you in understanding thefinancial analysis concepts, project economics models, fiscalregimes in the oil and gas industry, crafting the most dynamic

Who is the audience for this book and why they should not bewithout it?

It is also emphasized in the class that it is always helpful to draw

a time diagram to be able to visualize where the cash out-flows andin-flows are taking place The most common mistake in projecteconomics is when the economists fail to properly identify thetiming of the cash-flows Although it may look trivial, shifting acash-flow by one period can make significant difference in decisionmaking

Besides this book, specific to financial modeling, there are many,many other sources available to learn from They are all goodreferences but they provide generic use of Excel, that is, notspecific to financial modeling It takes time to understand thesegeneric applications and then try to incorporate them in thefinancial modeling I have concentrated on the use of some of theones I frequently visit or consult with, as shown below:

I frequently use Excel Forum (www.excelforum.com) when I

am stuck I have always received prompt and valuablesuggestions from the members of Excel Forum

From time to time I log into Chandoo’s blog(http://chandoo.org/wp) to capture new ideas

The Peltier Tech Blog (http://peltiertech.com) is another

5

useful blog with good tips and tricks from time to time

My Online Training Hub by Mynda Treacy(www.MyOnlineTrainingHub.com)

I have also subscribed to the Excel Demy’s(www.ExcelDemy.com) periodic e-mails with useful tips andtricks

However, a majority of the sites give generic examples and some

of them may not be even applicable to specific financial modelingsituations The thing that is different with this book is that it isspecific to financial modeling and bridges the gap between thegeneric and specific techniques

The concepts presented in this book are accompanied by Excelspreadsheets and worksheets so that the users can reinforce theirunderstanding by looking at how these are developed Thesespreadsheets are available in a Dropbox at the following link Forany questions, corrections, and suggestions please feel free tocontact the author at mianma@OGKnowledgeShare.com or

mianma.OGKnowledgeShare@gmail.com

All the figures and tables in this book are available at thefollowing link on DropBox

msYC-2JYd8WyaP_K534a?dl=0

1965: My father was a cashier in a bank I used to see big inch × 24-inch × 4-inch thick) books called ledgers Each page ofthese ledgers used to have several columns and rows Each bookcovered debits and credits for certain accounts These ledgerswere used to account for all the daily bank transactions of debitand credits Sometimes my father used to come very late fromthe office and when asked for the reason, my father would say

(24-“the ledger was not balancing—there was a difference of so manycents” (sometimes ridiculously small amount) We used to tellhim “Dad you should have just put this small amount of moneyfrom your pocket into the account.” He would laugh Theseledgers are now replaced by electronic ledgers

1971 to 1975: I was in engineering college We used to use an

instrument called Slide Rule and Log Books to perform all our

calculations The world’s first handheld and pocket calculatorwas introduced by HP on February 1, 1972 and by TexasInstruments (TI) on January 15, 1974 I was in my final year ofEngineering in 1975 when I got my first calculator I was theonly student in the university with a scientific calculator but Iwas not allowed to use it in my final year engineeringexamination Apparently, the invigilators thought that thecalculator will help me in answering the questions correctly orthey did not want me to have a competitive edge over the otherstudents

In 1975, the first programmable calculator (SR-52 by TI) withnonvolatile magnetic card storage was introduced in the market

W e used to have some of these in the early eighties withpetroleum engineering problems on cards

1978 to 1980: I was doing my masters in Colorado School ofMines, Golden, Colorado, US Even at that time we did not have

I took a course in Engineering Economics in 1980 We werenot allowed to use financial or programmable calculators,

throughout the course we used Interest Tables and simple

calculators to perform our financial calculations

In January 1981, I started my first job Even then we did nothave desktop computers or laptops or Microsoft products Weused to use a software called OGRE (Oil and Gas ReservesEvaluation) to perform our economics evaluations of oil and gas

assets We used to have Forms to fill out with the data input,

these forms were then handed over to a technician to enter thedata into computer, the results generated by the technician weregiven back to the engineer for review It used to take severalback and forth iterations to arrive at the final economics

Lotus 1-2-3 and MS-DOS Spreadsheets: The first PersonalComputer (PC) was introduced by IBM in August 1981 InJanuary 1983 Lotus 1-2-3 (spreadsheet software) was introducedespecially for the IBM PC For several years, it was a leadingspreadsheet for DOS It outsold some of the less popularspreadsheets like VisiCalc and Borland Quattro I started usingLotus 1-2-3 and Quattro in 1985

Microsoft Excel and Windows: Microsoft released the firstversion of Excel for the Macintosh on September 30, 1985 Inearly 1990, with the Windows Version 3.x platform, Excel tookmarket share from Lotus IBM discontinued Lotus 1-2-3altogether in 2013 I had just obtained proficiency in Lotus 1-2-3when it was replaced by Excel, so I had to start all over.Fortunately, there were many similarities between Lotus andExcel so the transition was not very painful

A Decision-Making Tool

Excel is used in many situations, from the simplest calculations tothe most cumbersome calculations, in our personal day-to-day

How soon can I pay off my debts?

How much should I save for my retirement and how muchshould I withdraw from my IRA so it will last for my lifeexpectancy?

Would spending a little less and saving a little more make adifference?

How long will it take to pay off my credit card?

How much would be my loan payments if I borrow a certainamount from a bank, when will my loan be paid off and howmuch would be my total interest payment?

What will be the profitability of my project investment, howmuch will I be paying in taxes, how would the profitabilitychange if I change a certain variable and what will be theexpected value of my investment if I assign probabilities tocertain variables?

An Overview of Excel

Spreadsheets (Lotus 1-2-3, Quattro, or Excel) were initiallypopularly used by accountants and bankers to maneuver loads ofnumbers These spreadsheets basically copied the format of thepaper-based sheets in the big (24 inch × 24 inch × 4 inch thick)ledgers that were used by accountants and bookkeepers for ages.With the passage of time and the power of Excel, many engineersand personnel from other disciplines have started using Excel tosolve complex scientific problems Currently Excel is considered asone of the most powerful tools available to help in formulatingcomplex financial and scientific problems

The most current version of Excel is 2016, but 2010 and 2013 arealso in use Every newer version introduces new functions andenhances some of the existing functions It always takes a short

learning curve to change from one version to the other and achievethe same proficiency.

Every Excel Workbook is an Excel file with extension abc.xls,

abc.xlt (pre 2007 versions) and the 2007 and newer versions withabc.xlsx (the default file format), abc.xlsm (macro-enabled fileformat), abc.xltx (Excel template, does not store VBA macro code),and abc.xltm (macro-enabled file format for Excel template, storesVBA macro code)

A Workbook may contain one or more Worksheets, also referred to as Spreadsheets, is identified by different Tabs at the

bottom of each worksheet Each worksheet is considered as a singlepage in the workbook and there could be various numbers ofworksheets (pages) within a workbook (file) depending on thenature of the problem being handled

Each worksheet has vertical Columns and horizontal Rows At the intersection of each Column and Row is each Cell Each

workbook contains 1,048,576 Rows, 16,384 Columns and thenumber of Worksheets is limited by available computer’s memory(default is 1 Sheet) The Cells can accommodate numbers, text andformulas, or a combination of the numbers and text Excel alsocontains 460 built-in functions such as financial functions,trigonometric functions, probability functions, and so on

Ribbons, Tabs, and Icons

Upon execution of Excel, a Home screen as shown in Figure 1.1

appears The Home screen shows the first worksheet (Sheet1) ofthe workbook at the bottom and the file name (Book1) at the verytop The file name will change when the workbook is saved under adifferent name All Excel commands and features with theirrespective icons are also shown at the top; this area is called the

Ribbon.

Figure 1.1 HOME Tab of Excel’s Ribbon

The Ribbon contains nine (9) main functional tabs and each tab

is further organized into several functional groups and action icons.The Home tab is organized into seven (7) functional groups, eachgroup represents certain functional icons A majority of thefunctions under each tab will be used in a variety of examples andillustrations in this book The Ribbon can be customized throughFile Excel Options Customize Ribbon One can add or removethe icons through this customization A customized tab, specific to

a certain project or workbook, can also be added to the Ribbon

A Quick Access Toolbar is shown at the top of the Ribbon in

the left-hand corner This toolbar includes few frequently usedicons such as (a) Save workbook and (b) Undo changes The QuickAccess Toolbar can be customized by clicking on the smalldownward arrow next to it

At the top of the Ribbon, in the right-hand corner, (a) × icon isused to close the file, (b) overlapping squares icon is used torestore down the worksheet, (c) square icon is used to maximize

Following the Ribbon is (a) Cell Reference, (b) Enter Data into

Cell ( ), (c) Cancel entry into Cell, (d) Insert function (fx) and

Cell’s content Main body of the worksheet with rows and columnsfollow this toolbar

Brief description of each tab is given in the following In amajority of cases, description of the command will appear when acursor is placed on an icon

FILE—This tab contains eleven (11) actions or tabs.

Info—contains four sub functions.

Protect Workbook enables the user to control access to his

or her workbook

Inspect Workbook allows the user to check the workbook

for hidden properties or personal information, content thatpeople with disabilities find difficult to read and check forfeatures not supported by earlier versions of Excel

Manage Versions allows the user to recover or delete

unsaved versions

Browser View Options allows to pick what users can see

when this workbook is viewed on the Web

Out of all these functions the Protect Workbook function isroutinely used

New—Enables the user to open a new workbook.

Open—Enables the user to open an existing workbook.

Save—Enables the user to save an existing workbook under

the same name

Save As—Enables the user to save an existing workbook under

a different name

Print—Allows to print the worksheet using various settings

and printer selection

Share—Sharing an Excel workbook through a OneDrive

location, e-mail (different options available) or present in aSkype meeting or conversation for real-time collaboration

Export—Creates PDF or XPS document of the worksheet or

change file type

Close—Closes the workbook after giving the option to save it

as is or save it under a different name

Account—Provides general MS Office account information Options—This is a very useful subtab under the File tab The

overall functionality of workbooks is controlled through thisfunction Some of the frequently used functions under this tabare the Ribbon Customization and Add-Ins options

HOME—This tab contains the commands that are frequently

used while working in Excel The Home tab is subdivided intothe following functional groups

Clipboard—Copy or Cut information to the clipboard and

then Paste it in a desired location using different options This group also includes Format Painter that helps in copying

format of certain cells and apply it to other desired cells Byclicking on the small arrow in the lower right hand corner of

Clipboard will show the list of items that are either copied or

cut to the clipboard

Font—This group allows the user to change the type, size,

color, and emphasis (underline, bold, italics) of the fonts.Changing the color of a cell(s) and placing border around acell(s) Clicking on the small arrow in the lower right hand

corner of Font shows the Format Cells dropdown menu This

provides additional formatting options such as (a) numbersformat, (b) alignment of data/text in cells, (c) Font type andsize and so on, (d) Cell borders, (e) fill—to change the color ofcell(s), and (f) protecting or unprotecting and hidinginformation in cells

Alignment—To select how the numbers or text in the cells

should like, that is, centered, flushed to the right, flushed tothe left, slanted, vertical, and so on This can also be done

through the Format Cells dropdown menu.

Number—To change the numbering format of the cell(s) such

as percentage, scientific, currency, and so on, and increase ordecrease the decimal places This can also be done through the

Format Cells dropdown menu, which appears on clicking on

the small arrow in the bottom right hand corner

Styles—Allows conditional formatting, formatting the cells as

a table (various table design options are given) and cell styles.The cell styles is used to differentiate between data input cells,cells with formulas, cells that are linked, and so on

Cells—To insert rows and columns, to delete rows and

columns, and format cells

Editing—Provides the Auto Sum and data sorting options It

also contains the Zoom icon, which is used for finding and

replacing certain information in certain cells and so on

INSERT ( Figure 1.2 )—This tab contains subgroups (a) Tables,

(b) Charts, (c) Sparkline, (d) Filters, (e) Links, (f) Text, and (g)Symbols

Tables—To convert selected cells into a desired table type,

create pivot table, and choose data source for pivot table Anexercise will be presented, later in the book, to learn how todevelop and use pivot tables

Illustrations—Insert pictures, shapes, SmartArt into cells,

and take screen shot

Charts—To insert a desired chart into worksheet Various

chart options are given

Sparklines—To insert in-cell charts.

Links—Insert a hyperlink to another file.

Symbols—Insert equations and symbols using this function.

Figure 1.2 INSERT tab of Excel’s Ribbon

PAGE LAYOUT ( Figure 1.3 )—This option is mostly used for

formatting the worksheet for printing and onscreen viewing Itcontains subgroups (a) Themes, (b) Page Setup, (c) Scale to Fit,(d) Sheet Options, and (e) arrange

Themes—Each theme uses a unique set of colors, fonts, and

effects to help in creating a consistent look and fee The Colors quickly changes all the colors in the document The Fonts

quickly changes the current fonts in the document The Effectsquickly changes the general look of any shapes in thedocument

Page Setup—Contains subtabs (a) Margins, (b) Orientation,

(c) Size, (d) Print Area, (e) Breaks, (f) Background, and (g)Print Titles

Margins are used to set the page margins on the top,

bottom, left, and right side of a page Orientation is to set the document in landscape or portrait orientation Size is

used to select paper size for printing the worksheet

Print Area is used to set the print area of the worksheet All

if you need to clear the current print area.

Breaks is used to insert or remove breaks, add a Break

where you want the worksheet to be printed on separatepages

Background is used to insert a picture, image, or any

theme in the background of the worksheet By clicking onthe Background it will take you to the Picture Library, click

on the picture or image you want to insert and click onInsert

Figure 1.3 PAGE LAYOUT tab of Excel’s Ribbon

Print Titles—Clicking on this icon opens a Page Setup

menu All the functions discussed above can also beperformed from this menu In addition, footers andheaders can be added to the worksheets in this menu The

Sheet tab in this menu is to specify a common title to be

printed on the printout of each worksheet The Page Setupmenu can also be accessed by clicking at the arrow in thebottom right hand corner of Page Setup tab in the Ribbon

Scale to Fit—If the printout of a worksheet cannot reasonably

fit on one page then the Scale to Fit tab can be used to adjustthe number of pages

Sheet Options

Sheet Right-to-Left icon is used to change the direction of

the sheet, that is, Cell A1 starts from the left or from theright

Grid Lines provides options to (a) add or remove gridlines

from the worksheet and (b) print the worksheet with orwithout the grid lines

Headings icon provides option to (a) add or remove the

column headings (A, B, and C, etc.) or row numbers and(b) print worksheet with or without the column headingsand row numbers Arrange allows the use to formatimages, that is, bringing an image forward, taking an image

backward, and so on.

FORMULAS ( Figure 1.4 )—This tab of the Excel Ribbon

contains (a) Function Library, (b) Defined Names, (c) formulaauditing, (d) Watch Window, and (e) Calculation

Figure 1.4 FORMULAS tab of Excel’s Ribbon

Function Library—This tab includes the following icons.

Excel provides some 460 built-in functions

Insert Function (fx)—Insert function dropdown menu

appears It is the same as the (fx) in the formula bar.

Desired functions can be easily searched and picked fromthis menu

AutoSum Function—Automatically adds up the data in

columns and rows

Recently Used—Every time a function is used it is captured

in this icon for easy reference and retrieval

Financial Functions—Adding financial function, such as

PV, FV, PMT, IRR, NPV, and so on, to the worksheet Thereare about 55 financial functions available

Logical Functions—Are used to add logical functions, such

as IF, IFERROR, AND, OR, IFNA, and so on, to theworksheet There are nine (9) logical functions available

Text Function—Adds text functions, such as LEFT, RIGHT,

MID, VALUE, CONCATENATE, and so on, to theworksheet There are 27 text functions available

Date and Time Functions—Add date or time functions

such as, DATE, MONTH, TODAY, DAYS 360, EDATE and

so on, to the worksheet There are 24 data and timefunctions available

Lookup and Reference Functions—Add lookup and

reference function, such as VLOOKUP, HLOOKUP,INDIRECT, MATCH, INDEX and so on, to the worksheet.There are 19 lookup and reference functions available

Math and Trig Functions—Add math and trigonometric

functions, such as DEGREES, AGGREGATE, COS, FACT,SIN and so on, to the worksheet There are 74 math and

trigonometric functions available.

More Functions—List of additional functions not found in

the above listed icons

Defined Names—Defined names such as Oil_Price, OPEX,

CAPEX, Oil_Production, Gross_Revenue, and so on, makeworking with ranges easier For Example, the oil price is given

in Cell B1 and oil production is given in Cell B2 Cell B1 isnamed Oil_Price and Cell B2 is named Oil_Production Thegross revenue in Cell B3 is then calculated by using theformula =Oil_Price*Oil_Production in Cell B3 Named rangesare used to navigate large worksheets and they can be used informulas instead of typing or pointing to specific cells Thereare two types of names you can create and use: defined nameand table name A defined name represents a cell, a range ofcells, formula, or constant, while a table name represents anExcel table, which is a collection of data stored in records(rows) and fields (columns)

This tab includes the following icons

Name Manager Icon—Shows a list of all the names that are

created

Define Name Icon—This icon is used to create names

Use in Formula Icon—Choose a name used in this

workbook and insert it into a formula

Create from Selection Icon—This is used to automatically

create names from column headings or row headings asthe case may be

The use of Defined Names function is shown here Figure1.5 shows how most of us will use formulas, that is, cellreferences The Gross Revenue in Cell B3 is calculated bymultiplying Cell B2 (Oil_Production) by Cell B1 (Oil_Price).The formula =B2*B1 in Cell B3 is shown in the formula bar atthe top

Figure 1.5 Using cell references in formulas

The same calculations are now performed using Range

Names The first step is to Define Name by placing the cursor

in Cell B1 and clicking on Formula Define Name OK Adropdown menu, as shown in Figure 1.6, appears Itautomatically picks the cell name from the cell on the left ofCell B1 (Cell A1) and the cell reference (Cell B1 in Sheet1) Youcan leave the name as is or change it to a name that is easy foryou to remember as shown in Figure 1.7 Similarly, Cell B2 isnamed as Oil_Production The new cell names Oil_Price andOil_Production are shown in Figure 1.7

Figure 1.6 New name in Define Name dropdown menu

Figure 1.7 New names for Oil_Price (Cell B1) and

Oil_Production (Cell B2)

The calculations of Figure 1.5 are now performed using thecell names as shown in the formula bar of Figure 1.8 Cell B3can also be named as Gross Revenue to be used in furthercalculations (such as calculating Net Revenue = GrossRevenue-Operating Expenditure-Deprecation-InterestPayment) in a financial model

Figure 1.8 Using range names in formulas

A range of cells in a column (such as A2 to A5) or a row canalso be named Figure 1.9 shows oil production in Cells A2 toA5 and oil price in Cells B2 to B5 The gross revenue iscalculated in Cells C2 to C5 by using Range Name as shown in

Figure 1.10 The formula Gross Revenue =OilProduction*OilPrice is entered in Cell C2 and then copied

to Cell C5

Figure 1.9 Using range names in calculating Gross

Revenue

Formula Auditing—The formula auditing function of Excel

helps in tracing errors in formulas The function includes (a)trace precedents, (b) trace dependents, (c) remove arrows, (d)show formula, (e) error checking, and (f) evaluate formula

Figure 1.10 Defining names for range of cells in Column A and Column B

i.

ii

iii

Trace Precedents—Shows arrows from the independent

variables to the dependent variable For example, grossrevenue is a product of oil price and oil volume When acursor is placed in the cell where gross revenue is

calculated and click on Trace Precedents, arrows will be

drawn from the oil price and oil volume to the this cell

Figure 1.11 shows the precedents of the drilling cost in CellF9, which is the number of wells in Cell E9 multiplied bythe drilling cost per well in Cell K1 and adjusted byinflation in Cell O3 year in Cell A9 and inflation base year

in Cell C4

Figure 1.11 Tracing Precedents of the drilling cost in Cell F9

Trace Dependents—Show arrows that indicate which cells

are affected by the value of the currently selected cell Forexample, place a cursor in the cell with oil price and click

on Trace Dependents, an arrow will be drawn from this cell

to the gross revenue cell Similarly, if a cursor is placed inthe oil volume cell and clicked on Trace Dependents, anarrow will be drawn from this cell to the gross revenuecell The dependent of the drilling cost are shown in Figure1.12, which are (a) sum of the total drilling costs from 2018

to 2043 and (b) the total CAPEX in Cell L9 The arrows can

be removed by clicking on Remove Arrows.

Figure 1.12 Tracing Dependents of the drilling cost in Cell F9

Remove Arrows—Removed the arrows drawn in 5ci and

Show Formulas—Display the formula in each cell instead

of the calculated value Figure 1.13 shows the formulas in

Column C Clicking on the Show Formulas again will

convert the formulas back to values

Figure 1.13 Formulas instead of values displayed in Cells C2 to C5

Error Checking—Check for common errors that occur

when entering formulas By clicking on this button or click

on the Error Checking option on its drop-down menu,

Excel displays the Error Checking dialog box, whichdescribes the nature of the error in the current cell,provides you help on it, and enables you to trace its

precedents Clicking on the Circular References option of

the Error Checking drop down menu will list the cellscontaining circular reference formula in the worksheet

Evaluate Formula—Debugs a complex formula by

evaluating each part of the formula individually

Watch Window—Adds cells to the Watch Window list to

keep an eye on their values while other parts of the worksheetare being updated

Calculation—This tab contains three options (a) Calculation

Option, (b) Calculate Now option, and (c) Calculate Sheetoption

Calculation Option—Provides an option to perform

calculations automatically when any number in theworksheet is changed or manually every time any number

is changed The Calculate Automatically option is normallyrecommended

Calculate Now (Shortcut Key: F9)—Use this option to

perform calculations after any number is changed in theworksheet This option is required only when theCalculation Option is set to manual

Calculate Sheet (Short Key: Shift + F9)—Same as Calculate

Now option but it performs calculation on the entire

DATA ( Figure 1.14 )—This tab of the Excel Ribbon contains six

additional tabs (a) Get External Data, (b) Connections, (c) Sortand Filter, (d) Data Tools, (e) Outline, and (f) Analysis Thefunctions that are used in financial modeling are theconnections, sort and filter, data tools, outline, and analysis.These will be individually explained in more detail with workingexamples

Figure 1.14 DATA tab of Excel’s Ribbon

Get External Data—There are various ways in which external

data can be imported into Excel Following are five differentsources of data import into Excel Only brief description isgiven as these functions of Excel are not routinely used infinancial modeling

From Access—To import data from Microsoft Access

database

From Web—To import data from a web page.

From Text—To import data from a text file.

From Other Sources—To import data from other data

sources

Existing Connections—To connect to an external data

source by selecting from a list of commonly used sources

Connections—It includes (a) Refresh All, (b) Connections,

(c) Data Range Properties, and (d) Edit Links

Refresh All (Ctrl + Alt + F5)—Update all the information

that is coming from a data source

Connections—Display all data connections to the

workbook These are links to outside data sources whichcan be updated if there are any changes in the data source

Data Range Properties—Specify how cells connected to

outside data source will update, what contents from thesource will be displayed, and how changes in the numbers

of rows and columns in the data source will be handled inthe workbook

Edit Links—Allow editing links if the existing linked

source names have changed

Sort and Filter—These functions are used to sort and filter

data This function of Excel will be described in more detail,with examples, later in the book

Data Tools—Includes five subfunctions (a) Text to Columns,

(b) Remove Duplicates, (c) Data Validation, (d) Consolidate,and (e) What-If Analysis These functions will be described inmore detail, with examples, later in the book These functionsare routinely used in the financial modeling decision analysisproblems

Outline—Includes (a) Group, (b) Ungroup, (c) Subtotal, (d)

Show Detail, and (e) Hide Detail

Group—Group a range of cells together so that they can be

collapsed or expanded

Ungroup—Ungroup the cells that have been previously

grouped

Subtotal—Total several rows of related data together by

automatically inserting subtotals and totals for theselected cells For example, Total Capital Expenditure(CAPEX) is subtotal of drilling expenditure (DRILEX),pipeline expenditure, facility expenditure, buildings, roadsexpenditure, and so on

Show Detail—Expands a group of collapsed cells

Hide Details—Collapse a group of cells

Analysis—Includes Data Analysis and Solver Add-in The Data

Analysis icon is used to perform various statistical analyses

By clicking on Analysis a dropdown menu, shown in Figure1.15, appears It includes 17 statistical analysis tools Some ofthese will be used, with examples, later in the book

Figure 1.15 Data Analysis dropdown menu

Solver is a very useful tool to perform What-If analysis It

helps in finding optimal solution of an objective function(target cell) by changing a single or multiple inputs to the

objective function It is similar to the What-If Analysis in the

a

Data Tools but What-If Analysis optimizes the target cell bychanging only one input cell Solver optimizes the target cell(objective function) by changing more than one input cellssimultaneously and at the same time it will honor any user-specified constraints applicable to the data input cells Solverwill be used again, with examples, later in the book

I f Solver is not shown in the Analysis tab of the Ribbon, it

can be added by clicking on File Options Add-Ins Solver

Add-Ins OK Solver will show in the Inactive Application

Add-ins if it is not enabled If Solver is enabled it will show in

the Analysis tab of the Ribbon and also in the Excel Add-InsOption as shown in Figure 1.16

Figure 1.16 Excel Add-Ins Options

REVIEW ( Figure 1.17 )—This tab includes four groups (a)

Proofing, (b) Language, (c) Comments, and (d) Changes Theproofing and language will seldom be used in financialmodeling The Spelling function of the proofing tab can be usedwhen building models to check spelling of the text Once thespell check is done then it will not be required in routingfinancial analysis

Comments—Used to add comments to selected cells as a

ready reference to the user The comments will help in alertingthe user to the limitation or application of the data in the cell

Figure 1.18 shows how comments are used The commentsmay be visible as shown in Figure 1.18 or invisible as shown in

Figure 1.19 The little triangles in the upper right corner of Cell

i.

ii

K3, F7 and F8 shows that these cells have linked comments.The invisible comments can be viewed by placing a cursor inthe cell with a little triangle in the upper right hand corner ofthe cell

Figure 1.17 REVIEW tab of Excel’s Ribbon

Figure 1.18 Comments inserted into Cells K3, F7, and F8

Figure 1.19 Comments are visible only when cursor is in the cell

New Comment—Place cursor in the cell to which a

comment has to be added and click on the New Comment

icon A rectangle, as shown in Figure 1.20, will appear inwhich the required comment may be added

Figure 1.20 Adding a new comment to a cell

Edit Comment—When a cursor is placed in the cell that

can be easily edited by clicking on the comment rectangle

and clicking on the Edit Comment icon.

Delete Comment—Click on the comment to be deleted and

click on the Delete Comment icon

Previous/Next—These icons are used to move between

comments if there are more than one comment in theworkbook Click on one comment and then click on

Previous icon to go to the previous comment of Next icon

to go to the next comment

Show/Hide Comment—This icon is used to show or hide a

comment connected to a selected cell

Show All Comments—To show or hide all comments in the

workbook The Show/Hide Comment icon is used to

selectively show and hide icons and this icon is used toshow or hide all comments

Show Link—Show or hide any link annotations on the

sheet

Changes—This tab is used to (a) protect sheet, (b) protect

workbook, (c) share workbook, (d) protect and shareworkbook, (e) allow users to edit ranges, and (f) track change

to the workbook

Protect Sheet—This icon is used to protect worksheet from

unwanted changes to the data and formulas in theworksheet It is always recommended to protect the cellswhere there are formulas or links to other cells The lockedcells in a protected sheet cannot be edited and the format

of the sheet cannot be altered The protection can be with

or without a password With the password protection onlythe users who have the password can unprotect theworksheet and make changes

Even in a protected sheet some cells, such as the dataentry cells, can be left unprotected where users can enterdata By default all cells are locked in a protectedworksheet To selectively leave some cells unprotected (a)highlight the cells that should be left unprotected, (b) right

click to open a dropdown menu, (c) click on Format Cells, (d) click on Protect tab in the Format Cells dropdown menu, and (e) select or deselect the Locked and Hidden

options as shown in Figure 1.21

If the Locked option is ticked then the user will not be

able to edit, enter, or delete data into any of the cells if theworksheet is protected So the data input cells shall be leftunlocked (with no tick mark) in a protected worksheet If

the Hidden option is ticked and the worksheet is protected,

the user will not be able to see the formulas used in thecells that are hidden (with tick mark)

Once the worksheet is protected then the Protect Sheet icon will automatically change to Unprotect Worksheet

icon

modifications to the structure of the workbook such asmoving, adding, or deleting worksheets This option canalso be used with and without password The withoutpassword option is not very useful because that can beeasily unprotected

Once the workbook is protected then the Protect

Workbook icon will automatically change to Unprotect Workbook icon.

Share Workbook—It allows multiple people to work on the

workbook simultaneously ad be able to individually savethe file The workbook has to be saved on a network andindividuals allowed to work on it are given access

Protect and Share Workbook—To protect and share a

workbook at the same time

Allow Users to Edit Ranges—Allows specific people to edit

specified ranges of cells in a worksheet or workbook

Highlight the cells that need to be left unprotected Click

o n Allow Users to Edit Ranges Click on New Enter

title for the range and password Click OK Click Apply Click OK Protect Sheet Only users allowed to enterdata into these cells will be given the password so they canenter or modify these cells

Track Changes—Track all changes (insertions, deletions,

and formatting) made to the document

VIEW ( Figure 1.22 )—This tab contains five additional tabs (a)

Workbook Views, (b) Show, (c) Zoom, (d) Window, and (e)Macros

Figure 1.22 VIEW tab of Excel’s Ribbon

Workbook Views—Provide different self-explanatoryoptions to format the viewing of the sheet

Show—Allows the user to show or hide (a) grid lines, (b) row

and column headings, (c) formula bar, and (d) ruler on the leftand top of the worksheet

Zoom—Allows the sizing (100 percent, 75 percent, 50 percent,

and so on) of the document

Window—Allows the user to freeze specified rows and

columns in large worksheets It also allows few other options

Macros—Used to view macros, record macros, and use related

references This tab will be discussed, with examples, later inthe book

DEVELOPER ( Figure 1.23 )—This tab provides advanced

options that are used by developers Some of these options,specific to financial modeling, will be discussed later in the book

Figure 1.23 DEVELOPER tab of Excel’s Ribbon

Excel Keyboard Shortcuts

Many Excel keyboard shortcuts are available to help in expeditingmany actions Some of the most commonly required or usedkeyboard shortcuts are listed here A majority of these shortcutswill work in Excel 2010, 2013, and 2016 The shortcuts refer to the

US keyboard layout Some of the shortcuts may be different inother keyboard layouts, that is, the layouts that do not correspondexactly to the US keyboard

If a certain keyboard shortcut is not valid in the newer version, abox will pop up alerting you that you are using keyboard shortcutfrom an older version of Excel Throughout this section the +means and So Ctrl + Shift + F12 means press Ctrl and Shift andF12 (all three buttons at the same time)

Copies a formula from the cell above the active cell into the cell

or the Formula Bar

Ctrl + Shift + “

Copies the value from the cell above the active cell into the cell

or the Formula Bar

Ctrl + Shift + ~

Change numbers to General format, similar to Right Click

Format Cells Number General

Ctrl + Shift + $

Changes numbers to Currency format, similar to Right Click

Format Cells Number Currency

Ctrl + Shift + %

Changes numbers to Percentage format, similar to Right Click

Format Cells Number General

Ctrl + Shift + ^

Changes numbers to Scientific format, similar to Right Click

Changes numbers to Date format, similar to Right Click

Format Cells Number Date

Ctrl + Shift + @

Changes numbers to Time format, similar to Right Click

Format Cells Number Time

Ctrl + Shift + !

Changes numbers to Number format, similar to Right Click

Format Cells Number Number

Alt + =

Works on both ROW(s) and COLUMN(s) individually orsimultaneously The (Alt + =) works on an entire table to providethe totals of all columns and all rows in one click It will work on asingle column or row or multiple columns and rows

Highlight all the cells including the blank cells at the bottom ofthe columns and to the right of the rows as shown in Figure1.24b

Press Alt + =

The SUM function will appear in the blank cells at the bottom ofthe columns and at the right of the rows as shown in Figure1.24c

Figure 1.24 Steps showing the use of “Alt + =” keyboard shortcuts

The same result can be obtained by using the AutoSum (∑)

function under the Formulas tab as shown in Figure 1.25 Inaddition to the summation of numbers in columns and rows, theAutoSum function also gives averages, maximum and minimum inthe range of numbers in columns and rows

Ctrl + Shift + A

This combination of shortcut keys will show the Functionarguments as shown in Figure 1.26 For example, you enter

=PV(and then press Ctrl + Shift + A, Excel will show =PV(rate,

nper, pmt, [fv], [type]) Double click on each argument tochange it to a cell reference or a desired value The cell reference

is assigned by double-clicking on the argument and then clicking

on the cell where the required value is

Figure 1.25 The AutoSum function of the Formulas Tab of Excel

Figure 1.26 Steps showing the use of Ctrl + Shift + A

keyboard shortcut keys

Accept Function with Autocomplete

Excel is very friendly when it comes to adding functions Lot oftimes we may not remember the full function argument.However, as soon as we enter the first alphabet of the functionExcel will show a dropdown menu with the list of functionsstarting with the required alphabet For example entering “=Y,”Excel will show the dropdown menu of Figure 1.27 and all thefunctions starting with “Y.”

By double clicking on the desired function, arguments of thefunction will appear as shown in Figure 1.28 Alternatively, click

on the desired function Press Tab Press Ctrl + Shift + A to

see the Function Arguments as shown in Figure 1.29

35

Figure 1.27 Dropdown menu of Insert Function

Figure 1.28 Dropdown menu of Insert Function

Figure 1.29 Function Arguments for the function YIELD

Insert ROW(s) and COLUMN(s): Ctrl + Shift +

These keyboard shortcuts are used to insert a single column, asingle row, multiple columns, or multiple rows As shown in

Figure 1.30, we want to add rows between B2 and B3 Highlight

ROW 3 Press Ctrl + Shift + A single row will be added

between the current ROW 2 and ROW 3 Multiple rows can be

added by continuously pressing Ctrl + Shift and repeatedly

pressing the + (plus sign)

Figure 1.30 Inserting ROWs using the Ctrl + Shift +

keyboard shortcut keys

Delete ROW(s) and COLUMN(s): Ctrl + – (minus sign)Highlight the ROW or COLUMN to be deleted and press Ctrl +–

Right Click and Control Keys

Excel allows the user to access various commands or functions inthree ways (a) the Office Ribbon at the top, (b) shortcut keys, and(c) right click in a worksheet Right clicking in any cell in an Excelworksheet opens a menu shown in Figure 1.31 This menu providessome commonly used functions from Ribbon’s Home tab, Formulatab (define name), Data tab (filter and sort), and Review tab (insertcomments) By right clicking in a cell with comment a newdropdown menu appears in which the Insert Comment is replaced

by three action options (a) Edit Comment, (b) Delete Comment,and (c) Show or Hide Comments

Figure 1.31 Menu resulting from right click on any cell in Excel worksheet

By clicking on the Format Cells, another dropdown menu

appears as shown in Figure 1.32 This menu can be used to select(a) number format, (b) cell alignment, (c) font type and sizeselection, (d) bordering the cells, (e) fill—changing cells’ color, and(f) locking cells or hiding formulas in a protected worksheet

Figure 1.32 Format Cells dropdown menu

Settings and Status Bar

Excel allows users to change default settings of the way Excel looks(status bar, fonts, number of sheet tabs, quick access tool bar, fonttype and size and Ribbon, etc.) like when it opens Thecustomization can be done by using File Options The ExcelOptions provides the following options for customization

General—General options (such as font type, font size, number

of default sheets, color scheme for the Ribbon and row andcolumn headings and so on) for working with Excel

Formulas—Change options related to formula calculation,performance, and error handling

Proofing—Changes how Excel corrects and formats text

Save—Customize how workbooks are saved

Set the office language preference

Advanced options for working with Excel

Customize Ribbon

Customize quick access toolbar

Add-Ins—View and manage Microsoft Office Add-ins

Trust Center—Helps keep your documents safe and yourcomputer secure and healthy

The status bar at the bottom of the worksheet can be customized

by right clicking on the status bar Right click on the status bar will

o pe n Customize Status Bar menu This menu can be used to

customize the status bar

Formatting Financial Models

Properly formatting financial models is essential because it makes

it easier to (a) for others to work with the models, (b) addstransparency to the calculations, (c) minimizes chances formistakes, (d) makes it easier to debug, and (e) makes alterations orupdates to the model Standardizing the formatting of spreadsheetscompanywide is also important It makes it easier for anydepartment or employee to use models created by otherdepartments or employees Following are some of the mostimportant formatting recommendations for building financialmodels

Creating flexible models—It is very important that

spreadsheets are as flexible and as simple as possible Creatingcomplex spreadsheets become difficult to debug and work withefficiently I have frequently encountered financial models withinherent mistakes in it just because their structure is complex.The models should follow logical sequence of calculations Myphilosophy is to build the model in such a way that it can beeasily printed on one A3 size paper

Many times financial modelers develop models with multipleworksheets such as (a) separate worksheet for data entry, (b)separate worksheet for depreciation calculations, (c) separateworksheet for cash-flow calculations, (d) separate worksheet forresults, and so on It is very difficult to use such models when

we have to conduct dozens of runs (cases or scenarios) withvariable assumptions For each run we have to have a separateworkbook which becomes cumbersome and keeping track of

It is recommended for a model to have (a) one data entryworksheet, (b) cash-flow calculation worksheet, and (c)summary worksheet The data entry worksheet should be theone with common data that can be used by multiple worksheets

in the same workbook The cash-flow calculation worksheet willhave data entry area (data that is specific to the currentworksheet), cash-flow calculation, and profitability indicators.The cash-flow calculation worksheet will have links to the

common data worksheet as applicable Each workbook maycontain multiple worksheets, each worksheet representing aseparate case or sensitivity or scenario The summary worksheetwill have links to individual worksheet to capture summary ofthe major parameters and results of each worksheet In this wayyou can have one workbook (one file) for each project ratherthan multiple files or workbooks for each project Figure 1.33

schematically shows a workbook (financial model) with severalworksheets

Never enter any hard coded numbers in the formulas, alwayslink all the variables in a formula to respective entry cells Keepthe formulas as flexible as possible in order to be able toaccommodate any changes, updates or sensitivity analysis in thefuture Figure 1.34 shows example of recommended formats forformulas It is very clear that the formula in Cell B7 is not goodbecause if at any time any of the input variables change, theperiodic payment will be incorrectly calculated On the otherhand, the formula in Cell B7 is flexible and it can address anychanges in the variables instantly and correctly Many suchsituations will be shown later in the book when we work withdeveloping a full financial model from scratch

Figure 1.33 Recommended format of a financial model showing (a) Summary worksheet, (b) Assumptions

worksheet, and (c) Cases worksheets; all worksheets are

in a workbook for a specific project