Improved financial modelling with conditional formatting

There are numerous tools and add-ins in the market constructed to enhance the ability to critically review formulas in Excel. Many of these tools build on the native functionality of Excel – trace dependents and trace precedents.

Mastering the native Excel tracking functions can make a big difference if you are not privileged to purchase one of the many tools (which I would recommend you to though if you are in the professional financial modelling space).

‘Standard’ trace precedents functionality

Most people know about the Formula Auditing toolbar and how to use it. It can be found in View -> Toolbars.

trace-1

The Trace Precedents functionality highlights with blue lines which cells have been directly used to calculate the active cell.

trace-2

If you press the Trace Dependents multiple time then you get to see the precious level of precedents.

trace-3

This can of course be quite useful but it can sometimes be very slow as a large financial model for a complex project may have 10, information pills
20 or even 100 levels of precedents for a high level output such as NPV or IRR.

Find anomalies (spreadsheet errors) with Trace ALL Precedents

In a small calculation module like the one above it is pretty easy to find errors, viagra
but when looking at larger spreadsheets we need to make this process more efficient. In a formal financial model audit the independent review process includes a cell-by-cell review of every unique cell in the financial model but when working internally there may not be enough time for this process to be completed.

The original example could be expanded to an example with five orders and a calculated total as per below.

trace-4

If this had been coded correctly then every order section should have the exact same structure as Order 1 in the original example.

One way of quickly identifying structural problems in an Excel section (the method doesn’t work on off-sheet references) is to us the Trace All Precedents functionality.

Trace All Precedents – CTRL + SHIFT + [

The Trace All Precedents functionality can be used via the Go To -> Special -> Precedents -> All Levels, order
but it is far too slow to be useful. The only way to use this efficiently is to use the Excel shortcut CTRL + SHIFT + [.

trace-5

In order for this to work you need to select a high level summary cell that is based on as much of the section you are reviewing as possible. In our example this cell is the ‘Total Order Value’ – the yellow cell with the value 1,950.

Select the yellow cell and press CTRL + SHIFT + [and you get the following results.

trace-6

By visual inspection we can now identify that the calculation patterns or Orders 3 and 4 are different to the others. Order 4 appears to be excluded altogether and all the assumptions of Order 3 are not used.

Based upon the visual inspection we can progress with a more detailed spreadsheet review, but focus on the identified areas alone. Tracing Precedents (the traditional way) yields the following result.

trace-7

The Excel calculation errors can be identifies as

  1. The Total Order Value sum does not include all Order Values
  2. The Order Value 3 (b) is using the Volume of Order Value 3 (a)

Limitations of the Trace All Precedents functionality in Excel

This spreadsheet review functionality is very powerful if used in the right context but it is also very important to know the limitations.

  1. It doesn’t follow links to other sheets or workbooks
  2. It can only be used to detect structural problems and to specific calculation errors. A hardcoded number within a formula would remain undetected until additional methods are used
  3. It works best when used in areas where there are section summaries available (which is the case in most well-built financial models) as the reviewed are may otherwise be too large to inspect by the visual method.

Excel trace functionality – further techniques

If you have found this useful then you should definitely review the Trace All Dependents functionality and the Row Differences and Column Differences tricks (They are all available from the Go To menu but it is by using the Excel shortcuts you can make this really efficient.

The Keyboard Shortcuts are available in this Excel Keyboard Shortcuts summary from Navigator Project Finance.
Presenting data in a format that is easy to read in Excel can be a challenge, viagra
in particular when you are dealing with larger arrays of data. In this example we will discuss how we can use the conditional formatting functionally in Excel to add dynamic lines within an area to improve the presentation and to make it easier for a user to read and absorb the data.

What is a ‘dynamic’ line?

In the picture below the pink lines highlighting every second line have not been inserted manually but are coded using conditional formatting. The advantage of using conditional formatting for this application is that it does not impact the layer of Excel that a user will manipulate. Even if a user would copy paste data or shift the data around within the table the presentation will still be preserved.

Picture 1. Dynamic lines coded with conditional formatting

Picture 1. Dynamic lines coded with conditional formatting

Use Conditional Formatting to generate dynamic lines

The conditional formatting tool in Excel is very powerful, in particular if you can master the ‘Formula Is’ functionality. To implement the dynamic lines you need to select the whole range of data – from ‘Base Case’ in the top left corner to “15%” in the lower right hand corner.

Click Format -> Conditional formatting and insert the formula:

=MOD(ROW($D31),2)=1

Choose the applicable format for the dynamic lines by clicking Format.

Picture 2: Conditional Formatting using =MOD(ROW..)..)

Picture 2: Conditional Formatting using =MOD(ROW..)..)

Customize the dynamic lines to only highlight every third line

To highlight the advantages of using dynamic lines instead of manual formatting we will show you how to update the conditional formatting to only highlight every third line as in the image below:

Picture 3: Conditional formatting used to highlight every third row

Picture 3: Conditional formatting used to highlight every third row

The only change you need to do to the conditional formatting is to update the “2” in the “Formula Is” section to a “3”.

Picture 4: Conditional formatting to highlight every third row.

Picture 4: Conditional formatting to highlight every third row.

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