Using Excel for Business

Transcription

1 Using Excel for Business Analysis

2 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, visit our Web site at 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.

3 Using Excel for Business Analysis A Guide to Financial Modelling Fundamentals Revised Edition DANIELLE STEIN FAIRHURST

4 Cover image: Leontura/iStockphoto.com and solarseven/istockphoto.com Cover design: Wiley Copyright 2015 by John Wiley & Sons Singapore Pte. Ltd. Published by John Wiley & Sons Singapore Pte. Ltd. 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 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 Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore , tel: , fax: , enquiry@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for any damages arising herefrom. 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 Weinheim, Germany ISBN (Paperback) ISBN (epdf) ISBN (epub) ISBN (o-book) Typeset in 10/12 pt, Sabon LT Std Roman by Aptara Inc, New Delhi, India Printed in Singapore by C.O.S. Printers Pte Ltd

5 Contents Preface ix CHAPTER 1 What Is Financial Modelling? 1 What s the Difference between a Spreadsheet and a Financial Model? 4 Types and Purposes of Financial Models 5 Tool Selection 6 What Skills Do You Need to Be a Good Financial Modeller? 17 The Ideal Financial Modeller 24 Summary 28 CHAPTER 2 Building a Model 31 Model Design 31 The Golden Rules for Model Design 33 Design Issues 35 The Workbook Anatomy of a Model 36 Project Planning Your Model 38 Model Layout Flow Charting 41 Steps to Building a Model 41 Information Requests 50 Version-Control Documentation 51 Summary 53 CHAPTER 3 Best Practice Principles of Modelling 55 Document Your Assumptions 55 Linking, Not Hard Coding 56 Enter Data Only Once 57 Avoid Bad Habits 57 v

6 vi CONTENTS Use Consistent Formulas 57 Format and Label Clearly 58 Methods and Tools of Assumptions Documentation 59 Linked Dynamic Text Assumptions Documentation 67 What Makes a Good Model? 70 Summary 72 CHAPTER 4 Financial Modelling Techniques 73 The Problem with Excel 73 Error Avoidance Strategies 75 How Long Should a Formula Be? 81 Linking to External Files 83 Building Error Checks 86 Summary 96 CHAPTER 5 Using Excel in Financial Modelling 97 Formulas and Functions in Excel 97 Excel Versions 101 Handy Excel Shortcuts 103 Basic Excel Functions 109 Logical Functions 112 Nesting: Combining Simple Functions to Create Complex Formulas 115 Cell Referencing Best Practices 119 Named Ranges 122 Summary 126 CHAPTER 6 Functions for Financial Modelling 127 Aggregation Functions 127 LOOKUP Formulas 140 Nesting INDEX and MATCH 153 OFFSET Function 157 Regression Analysis 161 CHOOSE Function 164 Working with Dates 166 Financial Project Evaluation Functions 174 Loan Calculations 180 Summary 186

7 Contents vii CHAPTER 7 Tools for Model Display 187 Basic Formatting 187 Custom Formatting 187 Conditional Formatting 193 Sparklines 200 Bulletproofing Your Model 204 Customising the Display Settings 208 Form Controls 216 Summary 232 CHAPTER 8 Tools for Financial Modelling 233 Hiding Sections of a Model 233 Grouping 238 Array Formulas 240 Goal Seeking 247 Structured Reference Tables 249 PivotTables 251 Macros 262 Summary 272 CHAPTER 9 Common Uses of Tools in Financial Modelling 273 Escalation Methods for Modelling 273 Understanding Nominal and Effective (Real) Rates 278 Calculating Cumulative Totals 283 How to Calculate a Payback Period 284 Weighted Average Cost of Capital (WACC) 288 Building a Tiering Table 293 Modelling Depreciation Methods 296 Break-Even Analysis 307 Summary 313 CHAPTER 10 Model Review 315 Rebuilding an Inherited Model 315 Improving Model Performance 323 Auditing a Financial Model 328 Summary 335 Appendix 10.1: QA Log 336

8 viii CONTENTS CHAPTER 11 Stress-Testing, Scenarios, and Sensitivity Analysis in Financial Modelling 337 What Are the Differences between Scenario, Sensitivity, and What-If Analyses? 338 Overview of Scenario Analysis Tools and Methods 340 Advanced Conditional Formatting 349 Comparing Scenario Methods 353 Summary 365 CHAPTER 12 Presenting Model Output 367 Preparing an Oral Presentation for Model Results 367 Preparing a Graphic or Written Presentation for Model Results 369 Chart Types 372 Working with Charts 380 Handy Charting Hints 386 Dynamic Named Ranges 388 Charting with Two Different Axes and Chart Types 394 Bubble Charts 400 Creating a Dynamic Chart 402 Waterfall Charts 407 Summary 420 About the Author 421 About the Website 423 Index 425

9 Preface This book was written from course materials compiled over many years of training in analytical courses in Australia and globally most frequently courses such as Financial Modelling in Excel, Data Analysis & Reporting in Excel, and Budgeting & Forecasting in Excel, both as face to face workshops and online courses. The common theme is the use of Microsoft Excel, and I ve refined the content to suit the hundreds of participants and their questions over the years. This content has been honed and refined by the many participants in these courses, who are my intended readers. This book is aimed at you, the many people who seek financial analysis training (either by attending a seminar or self paced by reading this book) because you are seeking to improve your skills to perform better in your current role, or to get a new and better job. When I started financial modelling in the early nineties, it was not called financial modelling it was just using Excel for business analysis, and this is what I ve called this book. It was only just after the new millennium that the term financial modelling gained popularity in its own right and became a re- quired skill often listed on analytical job descriptions. This book spends quite a bit of time in Chapter 1 defining the meaning of a financial model, as it s often thought to be something that is far more complicated than it actually is. Many analysts I ve met are building financial models already without realising it, but they do themselves a disservice by not calling their models, models! However, those who are already building financial models are not necessarily following good modelling practice as they do so. Chapter 3 is dedicated to the principles of best modelling practice, which will save you a lot of time, effort, and anguish in the long run. Many of the principles of best practice are for the purpose of reducing the possibility of error in your model, and there is a whole section on strategies for reducing error in Chapter 4. The majority of Excel users are self taught, and therefore many users will often know highly advanced Excel tools, yet fail to understand how to use them in the context of building a financial model. This book is very detailed, so feel free to skip sections you already know. Because of the comprehensive nature of the book, much of the detailed but less commonly used content, such as instructions for the older Excel 2003 users, has been moved to the companion website at References ix

10 x PREFACE to the content on the website, and many cross references to other sections of the book, can be found throughout the book. BOOK OVERVIEW This book has 12 chapters, which can be grouped into three sections. Whilst they do follow on from each other with the most basic concepts at the beginning, feel free to jump directly to any of the chapters. The first section Chapters 1 to 3 addresses the least technical topics about financial modelling in general, such as tool selection, model design, and best practice. The second section Chapters 4 to 8 is extremely practical and handson. Here I have outlined all of the tools, techniques, and functions in Excel that are commonly used in financial modelling. Of course it does not cover everything Excel can do, but it covers the must know tools. The third section Chapters 9 to 12 is the most important in my view. This covers the use of Excel in financial modelling and analysis. This is really where the book differs from other how two Excel books. Chapter 9 covers some commonly used techniques in modelling, such as escalation, tiering tables, and depreciation how to actually use Excel tools for something useful! Chapter 11 covers the several different methods of performing scenarios and sensitivity analysis (basically the whole point of financial modelling to my mind). Last, Chapter 12 covers the often neglected task of presenting model output. Many modellers spend days or weeks on the calculations and functionality, but fail to spend just a few minutes or hours on charts, formatting, and layout at the end of the process, even though this is what the user will see, interact with, and eventually use to judge the usefulness of the model. ACKNOWLEDGMENTS This book would not have been written had it not been for the many people who have attended my training sessions, participated in online courses, and contributed to the forums. Your continual feedback and enthusiasm for the subject inspired me to write this book and it was because of you that I realized how much a book like this was needed. The continued support of my family and network made this project possible. In particular, Mike, my husband, for his unconditional commitment and to whom this book is dedicated; my children who give me so much joy; as well as my remarkable parents and siblings, who have always inspired and encouraged me without question. I would like to give a special thanks to my ever patient assistant Susan Wilkin for her continuing dedication and diligence, as always. I could not do it without you all. I hope you find the book both useful and enjoyable. Happy modelling!