(Wiley finance) danielle stein fairhurst using excel for business analysis, + website a guide to financial modelling fundamentals wiley (2013)

Using Excel for Business Analysis Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals, as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more For a list of available titles, please visit our website at www.WileyFinance.com Using Excel for Business Analysis A Guide to Financial Modelling Fundamentals DANIELLE STEIN FAIRHURST John Wiley & Sons Singapore Pte Ltd Copyright ª 2012 John Wiley & Sons Singapore Pte Ltd Published in 2012 by John Wiley & Sons Singapore Pte Ltd Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center Requests for permission should be addressed to the Publisher, John Wiley & Sons (Asia) Pte Ltd., Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628, tel: 65– 6643–8000, fax: 65–6643–8008, e-mail: enquiry@wiley.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the Publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional person should be sought Neither the author nor the publisher is liable for any actions prompted or caused by the information presented in this book Any views expressed herein are those of the author and not represent the views of the organizations he works for Microsoft and Excel are registered trademarks of Microsoft Corporation Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany 978-1-118-13284-5 (Paper) 978-1-118-13285-2 (ePDF) 978-1-118-13286-9 (Mobi) 978-1-118-13287-6 (ePub) Typeset in 10/12pt, Sabon-Roman by MPS Limited, Chennai, India Printed in Singapore by Ho Printing Singapore Pte Ltd 10 For Mike, of course Contents Preface xi CHAPTER What Is Financial Modelling? What’s the Difference between a Spreadsheet and a Financial Model? Types and Purposes of Financial Models Tool Selection What Skills Do You Need to Be a Good Financial Modeller? The Ideal Financial Modeller Summary CHAPTER Building a Model Model Design The Golden Rules for Model Design Design Issues The Workbook Anatomy of a Model Project Planning Your Model Model Layout Flow Charting Steps to Building a Model Information Requests Version-Control Documentation Summary CHAPTER Best Practice Principles of Modelling Document Your Assumptions Linking, Not Hard Coding Only Enter Data Once Avoid Bad Habits Use Consistent Formulas Format and Label Clearly Methods and Tools of Assumptions Documentation Linked Dynamic Text Assumptions Documentation What Makes a Good Model? Summary 10 16 19 21 21 22 24 25 27 28 28 35 36 37 39 39 39 40 41 41 41 42 48 51 52 317 About the Website P lease visit this book’s companion website at www.wiley.com/go/steinfairhurst for more information on the tools discussed in this book The website includes addi- tional instructions, materials, downloads, and handy tips including: Instructions: n A detailed document containing instructions for how to use tools for which instructions differ between versions—for those still using Excel 2003 Materials: n Excel Versions (Chapter 5) Additional Material: n Basic Formatting (Chapter 7) n Break-Even Analysis (Chapter 9) n How to Create a Basic Line Chart (Chapter 12) Downloadable Resources: n Online resources including a list of websites, blogs, and tutorials for Excel and financial modelling (Chapter 1) n Shortcuts (Windows Version) (Chapter 5) Shortcuts (Mac Version) (Chapter 5) n QA Log template (Chapter 10, Appendix 10.1) n Models: n Model Assessment Checklist (Chapter 3) Salary Sacrifice Calculator (Chapter 7) n n Scenario Comparison (including both Exercise and Completed Versions) (Chapter 11) n Waterfall Chart (including both Exercise and Completed Versions) (Chapter 12) and much more 319 Index Absolute referencing, 87, 94 95 ActiveX controls, 170 171 Add-ins, 10, 19, 199 200 Aggregation functions, 64 65, 187 Alignment, 133, 258, 272, 306 Amortisation schedule, 127, 130 Ampersand, 49 Analysis ToolPak, AND, 83 84 Area chart, 281, 287, 290 Array formulas, 179 180, 182, 239, 256 Assumptions documentation, 5, 27, 32, 39, 42, 45 46, 48, 52, 57, 154 Assumptions layout, 21 Audit tool, AVERAGEIFS, 99 100 AVERAGE, 80 81, 84, 92 Axes, 246, 288, 294, 300 303 Balanced scorecard, Bar chart, 139, 278 280, 286, 290, 303, 307 309 Benchmarking, Best practice, ix x, 3, 6, 15, 17, 23, 32 34, 39, 40 43, 45, 47, 49, 52, 57, 60 62, 86, 90, 92, 107, 109, 180, 209, 216, 235, 245, 251 Binary code, 169 Boolean logic, 169 Break-even analysis, 229 230 Break-even point, 232 Bubble chart, 282, 289, 302 305, 307 Budgeting & Forecasting in Excel (course), ix Bulletproofing, 254 Business case, 2, 13, 24, 42, 48, 57, 121, 210, 252, 276 Cell link, 164, 166, 168, 268 269 Cell referencing, 41, 86 89, 92, 100, 219, 227, 247 248, 266 Charts, x, 5, 8, 25 26, 28 29, 31, 33, 143 144, 157, 228, 246, 275 279, 282 283, 285 291, 294 295, 297, 302, 304, 307 309, 313 Chart type, 145, 279, 282, 288 Checkboxes, 146, 164 CHOOSE, 112, 113, 269 Circular reference, 67 70, 197 Colour coding, 26, 41, 171 Colour scales, 141, 260 Column chart, 282 283, 285 287, 297 Combo box drop-down, 254, 268, 269, 273 Communication, 14, 15, 17 Compounding, 73, 127, 201 209 Conditional formatting, 4, 28, 65, 133, 139 143, 188, 260 263 Control key, 175 Cost of capital, 13, 48, 121 123, 126, 213 214, 216 COUNT, 76, 79, 81 COUNTIF, 65, 72, 93 95, 97 98, 100 COUNTIFS, 93, 97 98, 100 Cover sheet, 14, 24 26, 36 CSE formulas, 182 Currency symbols, 136, 302 Custom formatting, 120, 133, 135, 137 Dashboard, 2, 5, 288 Data bars, 139 Data collection, 31 Data tables, 27, 180, 239, 256, 260, 272 273 Data validation, 44, 153, 154, 254, 266, 268, 269, 273 Data validation drop-down, 254 Data validation input messages, 44 Dates, 25, 46, 112 113, 115 119, 121, 135 136, 204 205, 308 DAY, 118 119 DB, 221, 223 224 DDB, 221, 224 Debt, 69, 122, 126 127, 214 216, 255 Declining balance value methods, 222 Depreciation methods, 220 222 321 322 INDEX Design skills, 14, 19, 21 Developer tab, 158 159, 190 191 Discount rate, 216 Double declining balance method, 224 Drop-down boxes, 25, 27, 30, 90, 157, 254, 266, 270 EFFE CT, 127, 206 208 Effecti ve rates, 206 208 Enter key, 54 55, 243 EOM ONTH , 9, 116 117, 227 Equity , 122, 214 216 Error checks, 25, 54, 63, 65, 70, 96 Excel versions, 30, 135 Excel 2003, 9, 30, 43 44, 46 47, 59, 67 68, 70, 92, 97 99, 127, 133, 139, 149 150, 151, 154, 158, 178 179, 184, 186 187, Fixed declining balance method, 223 Fixed interest rate, 130, 201 Flag, 236 189, 192, 195 196, 236, 237, 243, 255, 258, 263, 272, 295 296, 302, 304, 309 Excel 2007, 9, 44, 60, 70, 73 74, 97, 120, 125, 127, 139 141, 143, 152, 155, 157 158, 170, 187, 191, 195 196, 198, 203, 208, 237 238, 263, 293, 302 Excel 2010, 68, 133, 135, 140 143, 152, 157 158, 190 Exponential operations, 204 F9, 76, 78, 83, 229 , 242 File stru ctur e, 36 37, 151 Filt er, 41, 97, 117 , 187 , 197 Fin anc ial fun ctio ns, 72, 121 Font, 14, 26, 36, 40, 46, 73, 133, 137, 139, 169, 194, 211, 260, 264, 267, 275, 312, 316 Footnoting, 45, 47, 52 Form control, 157 159, 167, 169, 170 171, 196, 254, 268 Format control, 166, 168 Formatting, x, 4, 14, 25, 27 28, 41, 46, 50 51, 65, 75, 77, 119 120, 133 143, 146, 171, 178, 188, 193 195, 231, 248, 259 263, 271, 277, 295, 304 F o r m a t t i n g : b a s i c , 3 c u s t o m , , Formula, 1, 4, 11, 16 18, 21, 23, 26 27, 32 34, 36, 40 41, 47, 49 52, 54 57, 59 79, 82, 83, 84 116, 118, 121, 123 133, 139, 148, 150, 152, 153, 157, 169, 170, 173, 178 184, 188, 197 198, 200 205, 207 212, 215 219, 221 231, 235 244, 246 248, 256 258, 261 271, 297 298, 308 309, 311 312, 314 315 Formula errors, 9, 54 Function, x, 7, 11, 14, 16 17, 21, 30 32, 37, 49 52, 63 66, 71 86, 92 131, 133 134, 137, 143, 158, 160, 169 171, 173, 182 187, 190 191, 198 203, 205 208, 211, 216, 218 219, 221 227, 233, 239, 248, 251, 255, 257 258, 262, 266, 268 269, 279, 295, 298 Funding, 69, 252 253 FVSCHEDULE, 203 Golden rules, 22 Grouping, 137, 147, 173, 178 179, 200 Growth, 4, 21, 42, 48, 53, 60, 73, 201 207, 214 215, 247 Hiding, 142, 147, 173 175, 177 178, 200, 296 HLOOKUP, 72, 103 107, 211 212 Hurdle rate, 121 Hyperlinks, 43, 46 48, 52 Icon sets, 140 141, 143 IF, 16, 40, 63 66, 71 72, 82 86, 111, 169, 205, 211, 217, 268 IFERROR, 66 67 In-cell comments, 43 44, 154 Indexation, 56, 201, 206, 248, 253 Inflation, 25, 40, 53, 201, 205 206, 207 Information requests, 35 I n h e r i t e d m o d e l , I n p u t s h e e t , , Interest, 1, 4, 7, 18, 53, 68 69, 72, 116, 121 131, 143, 184 185, 190, 201, 203 204, 206 209, 215, 230, 252 253, 255 273, 275, 293, 316 I n t e r e s t c a l c u l a t i o n s , 1 I n t e r e s t c a l c u l a t i o n s : circular reference 67, 68, 69, 70, 197 IPMT, 129 131 IRR, 13 14, 71 72, 121 126, 213, 216 ISERROR, 66 Iterative calculations, 69 Key assumptions, 14, 25, 39, 42, 57, 276 KPI, Index 323 LOOKUP, 86, 100, 104 107, 211 212, 217 219 Lookup functions, 100, 107, 218 Labelling, 41, 247 Line chart, 228, 230, 277 280, 286 288, 290 291, 296, 300 301 Macro, 11, 16, 30 Linked text, 49, 52 31, 35, 41, 69, Linking, 2, 5, 32, 36 90, 158, 167, 37, 39 41, 49, 173, 176 177, 52, 60 63, 70, 187, 189 195, 90, 97, 106 197 198, 200, 107, 157, 183, 270 209, 236, 251, M 265, 297 a Linking: c to external files, r 61, 70 o Loan : calculati ons, b 126, 206 u 207 t Loan t rates, o 207 n Logic, 2, 12 13, s 15 17, 19, 21, 24 26, 28, 31 34, 37, 51 52, 56 57, 72, Manag 76, 79, 82 ement 83, 117, report, 125, 161 3, 9, 162, 169, 187 Manua 199, 236, l 239, 243, sensiti 245 249, vity 273, 314 analysi s, 265 Log MAX, ic 72, 76, err 79 80 ors, 33 Methodology, 19, 34, 52, 57 59, 91, 56 265, 273, 276, 57 316 Log M ical I fun N ctio , ns, 72, 82 , , M i x e d r e f e r e n c i n g , , 8 M o d e l a u d it , 5 , M o d e l l a y o u t , 2 , M O N T H , 1 1 Named ranges, 9, 32, 61, 62, 89, 91 92, 106, 109, 157, 298 299 Nested formula s, 85 NOMIN AL, 127, 206 209, 247 Nomina l rates, 127, 208 NOW(), 113, 115, 133 134 NPV, 24, 48, 72, 121 123, 125 126, 213 214, 216, 276 N u m b e r f o r m a t s , N u m e r a c y , , OFFSET, 109 111, 236, 298 Option button, 157, 162 164 OR, 84 Oral presentation 275 Payback period, 121, 210, 212 213 Period, 24, 42, 69, 121 123, 125 130, 201 202, 204, 207 213, 220 221, 223 226, 278, 307 308 Pie chart, 279, 281, 287 288, 290, 292, 294, 296 Pivot tables, 41, 95, 97, 173, 186 188 PMT, 72, 127 131, 184 185, , P P M T , Pricing, 2, 12 13, 22, 25, 36 37, 56 57, 61, 85 86, 105 106, 197, 215 217, 228, 233, 245 Pricing model, 12 13, 22, 36, 215 Principal, 126 131, 201, 203 Profit, 2, 4, 13, 16, 24, 50 51, 68 69, 123, 139, 184, 197, 211 212, 220, 227 231, 233, 247, 261, 265, 267, 272, 276 277, 282, 288 289, 296, 300 304, 306 308, 311, 313 Pro gres sive tieri ng tabl e, 218 Proj ect eval uati on, 121, 213 Proj ect plan ning , 4, 8, 37 Protection, 34, 147 150, 154, 177 178, 244, 247 Purpose of model, 250 QA (Quality Assurance), 33 36, 245 250 QA log, 246, 248 250 R a d a r c h a r t , R a d i o b u t t o n , Rate, 1, 10, 13 16, 18, 21 27, 31 35, 37, 39, 42, 48, 50 55, 57, 58, 61, 63, 69 70, 73, 78 79, 84, 88, 92, 103, 116, 121 130, 136 137, 146, 157, 178, 182, 184 185, 201 210, 213 228, 230 231, 239, 245 249, 252 253, 255 262, 264 265, 288, 299, 307, 311 312, 314, 316 Red und ant ass ump tion s, 235 Rel ativ e refe renc ing, 88 Re mov e dupl icat es, 187 Repayments, 121, 126 129, 131, 184, 257 Ribbon, 68, 119, 133, 144 146, 152 153, 158 161, 163, 165, 168, 190 196, 199, 236 237, 241 243, 291, 294 295, 300, 302 324 Scenarios, 2, 3, 27, 29, 36, 56, 82, 182, 233, 246, 251 257, 260 261, 265 266, 268, 270, 272 273, 275 276 Scenario Manager, 254 256 Scenario methods, 254, 264, 273 Security settings, 190, 192, 198 Sensitivity analysis, x, 3, 40, 56, 122, 180, 182, 209 210, 246, 251 253, 256 257, 261, 265, 273, 275 Sensitivity testing, 276, 316 Shortcuts, 66, 74 77, 92, 239 SLN, 221 222, 226 227 Solver, 8, Sparklines, 143 147, 289 Spin button, 25, 165 Spreadsheet, 4, 7, 10, 14, 17, 19, 30, 48, 53, 55 56, 62, 91, 134, 139, 148, 178, 196, 199 200, 203, 235, 244 247, 255 256 Stress-testing, 34, 56, 246, 251 253, 257, 273 SUM, 71, 76, 78, 84, 182, 212 SUMIFS, 9, 93, 95, 97 100, 187 SYD, 221, 225 Tax, 12, 25, 48, 56, 72, 79, 82, 85, 112, 117, 128 129, 197, 208, 215 216, 218 220, 227 Tiering table, x, 86, 102, 216, 218 Time series, 23 24, 313 TODAY(), 113, 115, 134 Tool selection, x, 53 Tracing dependents, 237 INDEX Trace error, 239 Training course, 17, 19, 190 TRANSPOSE Array Function, 183 TRIM, 102 103 User-friendly (features), 24, 30 31, 51, 166, 180 Variance analysis, 2, 16, 139 VBA, 9, 167, 176, 189, 190, 194 195, 198, 268 Visual Basic Editor 176, 177 VLOOKUP, 11, 66 67, 71 72, 86, 100 107, 118, 153, 182, 212, 217 219, 266, 268 Waterfall, 307 316 WEEKDAY, 113, 117 118, 121 Weighted average cost of capital (WACC), 25, 122, 213 216 What-if analysis, 184, 252, 255 XIRR, 125 126 XNPV, 125 126 YEAR, 117 118 #DIV/0! 34, 66 #NAME? 239 #N/A 66, 102 #REF! 111, 236, 275 ... (COM) add-ins, Visual Basic for Applications (VBA) add-ins, Automation add-ins, or DLL add-ins Excel add-ins from all sources can be used to perform a variety of tasks that assist in the financial. .. www.WileyFinance.com Using Excel for Business Analysis A Guide to Financial Modelling Fundamentals DANIELLE STEIN FAIRHURST John Wiley & Sons Singapore Pte Ltd Copyright ª 2012 John Wiley & Sons Singapore... A spreadsheet shows actual historical data, whereas a financial model contains hypothetical outcomes A by-product of a well-built financial model is that we can easily use it to perform scenario