Join Curt Frye for an in-depth discussion in this video Avoiding common mistakes, part of Excel 2007: Financial Analysis.
It's amazing how many errors can creep into even the simplest worksheets. Most often the errors come from actions that seem very logical when you take them, but result in formulas that give you the wrong answers. Something you should avoid is using numbers as column headers. Instead, qualify the values with text to specify the type of data you're working with. For example, use FY 2009 for Fiscal Year 2009, and CY 2009 for Calendar Year 2009, and I'll show you why that could be a problem. In this worksheet, we have a Sales Summary by Region, North America, South America and so on, and we have the sales numbers here.
But let's see what happens if I create an AutoSum formula in cell B10. So, the cell's clicked, I go up to the Home tab, click the AutoSum button. Let's take a look at the formula Excel is trying to create. You'll notice that it includes the year. That's because 2007 is a number, which means Excel cannot distinguish it from the other values in the column and it tries to include it in the formula. However, if we change the value in that cell to CY 2007, I'll delete the formula and create a new AutoSum, because CY starts with text, Excel does not recognize it as a number, and it correctly creates the AutoSum formula with the cells B5 through B9.
Press Enter and there you have the correct result. Another error to avoid is hard-coding values in formulas. Move to this worksheet and you see that I have a loan, Principal of $10 million, Interest Rate of 6% and a Term of 12 years. Here's the formula that calculates the Monthly Payment. I'll click that so you can see the formula in the Formula bar. Now, you'll notice that I have the interest rate of 6% hard-coded into the formula. Instead of using a cell reference, we have the cell here B4 with the interest rate.
So, if I press Escape to get out of formula editing mode and change the value in B4 to 5%, the payment doesn't change, even though the interest rate changed. It should have gone down, because you're not paying as much interest in each payment. So what I should do, I'll change this back to 6%, is edit the formula so that it refers to the cell that contains the interest rate. So, I'll change the reference there to cell B4 and both of the other arguments, the number of periods, and the loan principal already used Cell References, so I don't need to change them.
I'll press Enter, there we have the value. Now when I change the interest rate to 5%, the payment will change. One final common mistake that Excel users make is creating formulas that cannot be copied accurately. They change Cell References when you move them. In this worksheet, I have calculations for monthly payments for two separate loans. One for a Factory Update and one for Storage Construction. This is an example of bad design. I have the principal and the term for each loan listed separately and instead of having the rate in a separate place entirely, I should have it here with the principal and the term for the two loans.
It's just an example of good design and you'll see why in a second. So, here I have the formula for the Payment for the Factory Update Loan and everything looks good. What I'll do now is copy that formula so that it works for the Storage Construction Loan. Now, there is no obvious error, but if you were to run these calculations you would find that there is actually an interest rate of 0% being applied to this loan. You can determine that by going up to the formula bar, where we have Payment and then D3.
Now, cell D3 is the cell from which Excel is attempting to draw the interest rate for this loan, but you'll note that it's empty. The interest rate that you want is over in cell B3. The mistake happened because when you copy a formula from one cell to another, if you don't do anything special to these Cell References, Excel figures, oh! you want me to shift all the Cell References as far up-and-down or left-and-right in the worksheet as you shifted the formula when you copied and pasted it.
So, if you compare the two formulas, here we have D3, D8, and D7, and here, we have B3, B8, and B7. The change occurred when we copied the formula from here to here. So, how do you keep cell B3 constant in this formula? That's again where the interest rate is. I'll delete this to show you what happens when you copy it. What you need to do is click on the formula argument with the cell that you want to remain constant and press F4.
Pressing F4 adds dollar signs in front of the column and the row. What the $ means is that the reference which was a relative reference and capable of changing has now become an absolute reference. That means it will not change. So in this case, both the row and the column will stay the same. If you press F4 again, now the column can change but the row can't. If you press it again, the column will not change but the row can. If you press it again, you're back to the relative reference at the start, where both the column and the row can change.
So, pressing F4 to edit the Cell Reference, so it will not change. Press Enter to keep the formula and now when we copy it, you get what turns out to be the right result. By following these strategies you'll avoid the most common spreadsheet errors and be well on your way to creating usable and accurate worksheets.
- Building a financial worksheet with Pivot Tables
- Reviewing financial statements through common-sized balance sheets
- Calculating percentage change over time in financial statements
- Determining profitability ratios and return on investments
- Studying liquidity and activity ratios through an average collection period
- Computing the future value of an investment