Table of Contents Chapter 3 (The Art of Modeling with Spreadsheets)

The Everglade Golden Years Co. Cash Flow Problem (Section 3.1) The Process of Modeling with Spreadsheets (Section 3.2) 3.23.3 3.33.11

Guidelines for Building Good Spreadsheet Models (Section 3.3)

Debugging a Spreadsheet Model (Section 3.4)

3.123.16
3.163.20

The Everglade Cash Flow Problem

Year 2003 2004 2005 2006

Projected Net Cash Flow (millions of dollars) 8 2 4 3

2007
2008 2009 2010 2011 2012

6
3 4 7 2 10

The Everglade Cash Flow Problem

Their short-term cash flow requirements cannot be met without borrowing. A long-term (10 year) loan can be taken with an interest rate of 7%

A series of short-term loans (1 year) can be taken with a projected interest rate of 10%

Question: Which loan (or combination of loans) should be taken, and in what amounts, in order to maximize their cash-balance position after 10 years?

The Process of Modeling

Visualize w here you want to finish Do some calculations by hand Sketch out a s preadsheet

Plan

Build

Start w ith a small-sc ale model

Expand the model to full scale

Test

Try different trial s olutions to c heck the logic

Analyze

Evaluate propos ed solutions and/or optimize w ith Solver If the solution reveals inadequacies in the model, return to Plan or Build

Plan: Visualize Where You Want to Finish

A common stumbling block in the modeling process occurs right at the beginningHow do I get started? At this point it can be useful to ask the questionWhere do I want to end up?
What information do I need to provide in a report? What should the answer look like? What kinds of numbers need to be included in the recommendation?

What information is needed in the Everglade Cash Flow problem?

Plan: Do Some Calculations by Hand

Another common stumbling block arises when trying to enter a formula in one of the output cells. At this point, it can be useful to do some calculations by hand.
Just pick some numbers for the changing cells and determine what the results should be.

Suppose Everglade takes out a $6 million long-term loan and then adds shortterm loans of $2 million in 2003 and $5 million in 2004.
How much cash will they have left at the end of 2003? How much cash will they have left at the end of 2004?

Plan: Sketch Out a Spreadsheet

LT Rate ST Rate Start Balance Minimum Cash Cash Flow 2003 2004 : >= : LT Loan ST Loan LT Interest ST Interest LT Payback ST Payback Ending Balance Minimum Balance

2012 2013

Build: Start with a Small Version

If the model is complicated, start with a small, readily manageable version of the model. First make sure youve got the logic of the model worked out correctly for the small version. Only then expand it to full size.
C D E F G H I J K L

B 3 LT Rate 4 ST Rate 5 6 Start Balance 7 MinimumCash 8 9 10 Year 11 2003 12 2004

7% 10% 1 0.5 Cash Flow -8 -2

G

(all cash figures in millions of dollars)

LT Loan 6

ST Loan 2 5
H

LT Interest -0.42
I

ST Interest -0.20

LT Payback

ST Payback -2.00

Ending Balance 1.00 1.38

K

>= >=

Minimum Balance 0.50 0.50

L

F 9 LT 10 Interest 11 12 =-LTRate*LTLoan

ST Interest =-STRate*E11

LT Payback

ST Payback =-E11

Ending Balance =StartBalance+SUM(C11:I11) =J11+SUM(C12:I12)

>= >=

Minimum Balance =MinimumCash =MinimumCash

Test: Test the Small Version of the Model

Test the small model thoroughly. Try values in the changing cells for which you know the answers (at least approximately).
Examples: All zeroes All ones Very large numbers Numbers for which youve done hand calculations

Expand the model to full size (copying formulas to the later years). Test the large model in a similar way.

Analyze: Analyze the Model (Before Solver)

B 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

LT Rate ST Rate Start Balance Minimum Cash

7% 10% 1 0.5 Cash Flow -8 -2 -4 3 6 3 -4 7 -2 10 LT Loan 6 ST Loan 2 5 0 0 0 0 0 0 0 0 (all cash figures in millions of dollars)

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LT Interest -0.42 -0.42 -0.42 -0.42 -0.42 -0.42 -0.42 -0.42 -0.42 -0.42

ST Interest -0.20 -0.50 0 0 0 0 0 0 0 0

LT Payback

ST Payback -2 -5 0 0 0 0 0 0 0 0

-6

Ending Balance 1.00 1.38 -8.54 -5.96 -0.38 2.20 -2.22 4.36 1.94 11.52 5.10

>= >= >= >= >= >= >= >= >= >= >=

Minimum Balance 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

Analyze: Analyze the Model (After Solver)

B 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

LT Rate ST Rate Start Balance Minimum Cash

7% 10% 1 0.5 Cash Flow -8 -2 -4 3 6 3 -4 7 -2 10 LT Loan 6.65 ST Loan 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 (all cash figures in millions of dollars)

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LT Interest -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47

ST Interest -0.09 -0.34 -0.82 -0.65 -0.16 0 -0.37 0 0 0

LT Payback

ST Payback -0.85 -3.40 -8.21 -6.49 -1.61 0 -3.70 0 0 0

-6.65

Ending Balance 0.50 0.50 0.50 0.50 0.50 1.27 0.50 2.97 0.50 10.03 2.92

>= >= >= >= >= >= >= >= >= >= >=

Minimum Balance 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

Guidelines for Building Good Spreadsheet Models

Enter the Data First
Any spreadsheet model is driven by the data It is easier (and usually better) to build the model around the data

Organize and Clearly Identify the Data

Relevant data should be grouped (e.g. in tabular form) All data should be labeled Units should be identified

Enter Each Piece of Data into One Cell Only

Refer to the original data as needed This makes the model much easier to modify (only need to change data in one place)

Guidelines for Building Good Spreadsheet Models

Separate Data from Formulas
Avoid putting numbers directly in formulas Put numbers in data cells and refer to them as needed This makes all data visible and easier to modify

Keep It Simple
Avoid power functions of Excel if possible Break out complicated formulas into subtotals

Use Range Names

Refer to data cells and blocks of cells using Excels range name feature Range names make formulas and the Solver model much easier to read Care must be taken not to overuse range names and to make sure they remain correctly defined.

Guidelines for Building Good Spreadsheet Models

Use Relative and Absolute References to Simplify Copying Formulas
Whenever multiple related formulas will be needed, try to enter the formula just once, and then use Excels fill commands to replicate the formula. This makes the model easer to build and also reduces typos.

Use Borders, Shading, and Colors to Distinguish Cell Types

For example: Data cells in blue (no border) Changing cells in yellow (regular border) Target cell in orange (heavy border)

Show Entire Model on Spreadsheet

All data should be visible. All constraints should be on the spreadsheet (not buried in Solver), preferably in three consecutive cells.

Three Tests for a Good Spreadsheet Model

You should be able to immediately identify the data cells, changing cells, and target cell. All elements of the model should be visible on the spreadsheet (including all constraints). You should not have to look in the Solver dialogue box to figure out the model. Each equation should be simple enough that you can tell what the equation is in each output cell without looking.

A Poor Spreadsheet Model

B 3 4 5 6 7 8 9 10 11 12 13 14 15 C D E E 3 4 5 6 7 8 9 10 11 12 13 14 15

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LT Loan 6.65

ST Loan 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0

Ending Balance 0.50 0.50 0.50 0.50 0.50 1.27 0.50 2.97 0.50 10.03 2.92

Ending Balance =1-8+C5+D5 =E5-2+D6-$C$5*(0.07)-D5*(1.1) =E6-4+D7-$C$5*(0.07)-D6*(1.1) =E7+3+D8-$C$5*(0.07)-D7*(1.1) =E8+6+D9-$C$5*(0.07)-D8*(1.1) =E9+3+D10-$C$5*(0.07)-D9*(1.1) =E10-4+D11-$C$5*(0.07)-D10*(1.1) =E11+7+D12-$C$5*(0.07)-D11*(1.1) =E12-2+D13-$C$5*(0.07)-D12*(1.1) =E13+10+D14-$C$5*(0.07)-D13*(1.1) =E14+D15-$C$5*(1.07)-D14*(1.1)

Debugging a Spreadsheet Model: The Toggle

B 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

LT Rate 0.07 ST Rate 0.1 Start Balance 1 Minimum Cash 0.5 (all cash figures in millions of dollars)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Cash LT ST LT Flow Loan Loan Interest -8 6.64945900216724 0.85054099783276 -2 3.40105722776774 =-LTRate*LTLoan -4 8.20662508069623 =-LTRate*LTLoan 3 6.49274971891755 =-LTRate*LTLoan 6 1.60748682096102 =-LTRate*LTLoan 3 0 =-LTRate*LTLoan -4 3.69915976336053 =-LTRate*LTLoan 7 0 =-LTRate*LTLoan -2 0 =-LTRate*LTLoan 10 0 =-LTRate*LTLoan =-LTRate*LTLoan

ST Interest =-STRate*E11 =-STRate*E12 =-STRate*E13 =-STRate*E14 =-STRate*E15 =-STRate*E16 =-STRate*E17 =-STRate*E18 =-STRate*E19 =-STRate*E20

LT Payback

ST Payback =-E11 =-E12 =-E13 =-E14 =-E15 =-E16 =-E17 =-E18 =-E19 =-E20

=-LTLoan

Ending Balance =StartBalance+SUM(C11:I11) =J11+SUM(C12:I12) =J12+SUM(C13:I13) =J13+SUM(C14:I14) =J14+SUM(C15:I15) =J15+SUM(C16:I16) =J16+SUM(C17:I17) =J17+SUM(C18:I18) =J18+SUM(C19:I19) =J19+SUM(C20:I20) =J20+SUM(C21:I21)

>= >= >= >= >= >= >= >= >= >= >=

Minimum Balance =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash =MinimumCash

Pressing control-~ toggles back-and-forth between showing values and showing formulas in the spreadsheet.

Debugging with the Auditing Toolbar

The button third from the left can be used to trace the dependents of a cell, that is, those cells with formulas that refer to this cell.
The leftmost button can be used to trace the precedents of a cell, that is, those cells that appear within the formula for this cell.

Dependents of the LT Loan Cell

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Everglade Cash Flow Management Problem

LT Rate ST Rate Start Balance Minimum Cash 7% 10% 1 0.5 Cash Flow -8 -2 -4 3 6 3 -4 7 -2 10 LT Loan 6.649 ST Loan 0.851 3.401 8.207 6.493 1.607 0.000 3.699 0.000 0.000 0.000 (all cash figures in millions of dollars)

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LT Interest -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465

ST Interest -0.085 -0.340 -0.821 -0.649 -0.161 0.000 -0.370 0.000 0.000 0.000

LT Payback

ST Payback -0.851 -3.401 -8.207 -6.493 -1.607 0.000 -3.699 0.000 0.000 0.000

-6.649

Ending Balance 0.500 0.500 0.500 0.500 0.500 1.266 0.500 2.965 0.500 10.035 2.920

>= >= >= >= >= >= >= >= >= >= >=

Minimum Balance 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Precedents of the ST Interest (2004) Cell

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Everglade Cash Flow Management Problem

LT Rate ST Rate Start Balance Minimum Cash 7% 10% 1 0.5 Cash Flow -8 -2 -4 3 6 3 -4 7 -2 10 LT Loan 6.649 ST Loan 0.851 3.401 8.207 6.493 1.607 0.000 3.699 0.000 0.000 0.000 (all cash figures in millions of dollars)

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LT Interest -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465

ST Interest -0.085 -0.340 -0.821 -0.649 -0.161 0.000 -0.370 0.000 0.000 0.000

LT Payback

ST Payback -0.851 -3.401 -8.207 -6.493 -1.607 0.000 -3.699 0.000 0.000 0.000

-6.649

Ending Balance 0.500 0.500 0.500 0.500 0.500 1.266 0.500 2.965 0.500 10.035 2.920

>= >= >= >= >= >= >= >= >= >= >=

Minimum Balance 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5