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“More often than not just one person in a company has the
knowledge of how the financial spreadsheet models are
constructed. Other people are unable to understand and therefore
check the analysis. The potential for errors is massive.”
This book focuses on one main topic: the influence chart. An influence chart is
a very powerful tool. An influence chart provides an overview of your Excel
model. It shows all the items (the values and formulas) and how these are
connected to one another.
An influence chart is so important that experts recommend that we draw an
influence chart before we enter the values and formulas to develop an Excel
model.
As we all know, most people don’t do that. We simply enter the values and
formulas and design the model as we type.
Furthermore, the connections among items are not obvious in an Excel model.
In fact, the connections are very well hidden.
Even when we are handed an influence chart for an Excel model, we don’t
know whether the Excel model really follows the influence chart.
This book shows how we can easily and quickly draw an influence chart from
an Excel model, with the help of Power Formula Auditing. The automatically
generated influence chart shows how the Excel model is really organized.
An influence chart has many important uses. It provides an overview of the
Excel model. This enables us to understand the model at a high level, to know
how various components are connected.
A good influence chart will also give visual clues of the components in an
Excel model.
In addition, an influence chart is very useful for identifying errors. Some errors
are very obvious once the influence chart is drawn. These will be illustrated in
the later chapters.
Excel has some basic, and tedious, functions to draw an influence chart from
an Excel model. This book illustrates how to use these functions. In addition,
this book will illustrate a special-purpose add-in software that gives enhanced
influence charts, and with less effort.
Let us consider a few simple examples of influence charts.
Example 1: Interest Calculation
This is a very simple example for interest calculation. It calculates the interest
earned after one year, given the deposit amount and the interest rate.
Note that the influence chart shows the connections, but usually not the actual
values.
This next figure shows how the Excel model looks like. The model includes
the actual values, e.g., 2% for the interest rate. However, the connections are
not show visually. The connections are “hidden” within the formula for interest
earned.
Looking at the formula for cell D2 (=C4*C5/100), we know that cell D2 is
linked to cell C4 and C5. (A cell is a single rectangle in a spreadsheet table.)
This model is about monthly expenses. The total expense is the sum of rent,
food, entertainment, clothing and transport expenses. The influence chart is
shown below.
Notice that Excel does not show the separate arrows that we have drawn in the
original influence chart. When the formula uses a range of cells (D2:D6), a box
over the range of cells is shown with a single arrow.
2. Uses of Influence Charts
The next figure shows the model with the automatically generated influence
chart.
It is now quite easy to see that the last few rows of data were left out of the
average calculation. The blue boxes (used for sum and average functions
which state a range of cells) do not cover the last few row.
It is obvious that row 25 to row 29 are not included.
Figure 8. Trace Precedents highlights Errors in GDP Growth Model
When all the rows are correctly included in the average, the influence chart
should appear as in the next figure.
This example shows how an influence chart can give clear clues about
possible errors.
In the later chapters, we will enhance the influence chart with additional
software that can be added to Excel (add-ins software). The enhanced
influence charts are easier to use, have more features, and are better at
indicating potential errors.
Figure 9. Trace Precedents for Corrected GDP Growth Model
3. An Under-utilized but Powerful Tool
These functions are essential for any spreadsheet user. If you want to
understand how your spreadsheet formulas are connecting all the cells, tracing
precedents and dependents is the best method in Excel.
A formula in a cell (X) may refer to another cell (Y). Then, Y is called the
precedent of X, and X is called the dependent of Y.
Excel provides an easy way to identify all precedents of a cell, or all
dependents of a cell.
Simply select a cell, and click the "Trace Precedents" or "Trace Dependents"
button. These buttons are organized under the “FORMULAS” menu in Excel.
The set of formula tracing buttons is called “formula auditing”, or “auditing
toolbar”.
Excel will draw the precedent arrows after a few clicks. Select (click on) cell
D10. Then click “trace precedents” a few times. Each click traces the
precedents one level further.
Figure 12. A Simple Excel Model with Precedents Traced
Note that the beginning of an arrow has a big dot. This is important to bear in
mind when we look at many overlapping arrows. The end of an arrow has an
arrow-head. An arrow goes from a precedent cell to a dependent cell.
Tracing precedents is particularly useful when we want to know what other
cells (values and formulas) affect the selected cell. For example, if cell D6 is
the profit of a company, the precedents show the other items that have an effect
on the profit value.
Looking at arrow connections is much easier than looking at formulas in each
cell, which can also be done by showing all formulas at once (“Show
Formulas” button).
Figure 13. A Simple Excel Model with Formulas Shown
Trace dependents
The “Trace Dependents” button produces similar results. For example, in the
next figure, we select cell A4. Clicking “Trace Dependents” will find the cells
dependent on A4, i.e., the cells with formulas that refer to A4.
The first click will show the immediate dependents (in this case, only one
arrow from A4 to C3). The second click will show the dependents of the
immediate dependents (in this case, another arrow from C3 to D6).
The “Trace Dependents” button is particularly useful when we want to know
how the Excel model will be affected when we change the values in a cell.
Tracing dependents show us all the cells that will be affected.
This technique is very fast and simple for tracing precedents of a single cell.
For some complex tracing, we need to go back to the “Trace Precedents” and
“Trace Dependents” buttons.
Where cells are stated one by one in a formula, the arrows are shown
separately. As we have seen earlier, where a formula states a range of cells,
e.g., A1:A5, the arrows are organized into one arrow. An illustration is shown
below.
The above figure shows a formula where every precedent cell is explicitly
stated. Tracing precedent shows an arrow from each precedent cell.
If we trace the dependents of Ben’s English mark, the following figure will
appear. First select Ben’s English mark (click on it), then click on “Trace
Dependents”.
Figure 19. Trace Dependents
Since Ben’s English mark is used by only one cell, there is only one arrow
from there.
The “box arrow” drawn by “Trace Precedents” will not appear when we trace
dependents. It is a good point to bear in mind. Tracing precedents over an
entire worksheet may not give an identical set of arrows, compared to tracing
dependents.
The next figure shows the result when we trace the dependents for every cell
(click on “Trace Dependents” after selecting each cell). Notice that the pattern
of arrows is quite different.
"He said the reports his office sent to KPMG didn't include one account, which
threw off his department's financial statements. The total cash on hand for June
30 that the office should have reported was $128.9 million, he said, and not
$122.7 million, which was what was sent to the auditor. It occurred when one
account wasn't correctly linked into an Excel spreadsheet."
Example 1: A payroll model
For an example of how precedent arrows can give clues to errors, consider
this spreadsheet (given in this article (Ferret Out Spreadsheet Errors, Use
Excel’s tools to uncover and correct formula problems.by Mark G. Simkin,
January 31, 2004, JournalofAccountary.com)
The precedent picture generated from the spreadsheet is given below. This is
generated by selecting the “total” cell (G14) and clicking “Trace Precedents” a
few times.
Irregularities in the blue dots indicate potential errors. A blue dot on a cell
means that the cell is the beginning of one or more precedent arrows.
Lack of a blue dot means that the cell is not used (for the set of precedent
arrows shown). A missing blue dot may indicate a missing connection.
Notice that in column C (regular hours), only one cell has a blue dot, indicating
that this cell is used in some formula in other cell or cells. More importantly,
the other cells in column C are not used, as they do not contain any blue dots.
This pattern strongly suggests the presence of errors, and these cells should be
checked thoroughly.
The relevant portion is shown below.
In column D (overtime hours), there is also a cell without a blue dot, different
from its neighbors. This also indicates a potential error. If you look harder, you
can find that cell F7 also has a different arrow pattern compared to its
neighbors.
This example illustrates a very important use of the automatically generated
influence chart. While the items are there, the connections are missing.
The influence chart makes the missing connections visually obvious.
Example 2: An economics model
Excel’s tools for tracing precedents and dependents are very useful. They can
be make even more useful with some additional programming. An enhanced
tool for generating better influence charts can be downloaded here: Power
Formula Auditing (Excel 2013).
Power Formula Auditing has very good improvements over Excel’s tracing of
precedents and dependents. The main improved features include:
- The ability to select many cells for tracing precedents and
dependents. Excel’s trace precedents/dependents buttons are limited to
only one selected cell.
- The ability to get an entire overview with just 2 clicks. Simply select
the entire spreadsheet, and click one button on the new toolbar.
Currently, to get an overview may require a few hundred clicks, and
most people will just not do it, and they will miss out on powerful
influence charts.
Excel’s “Trace Precedents” and “Trace Dependents” works only for one cell.
For example, in the above figure, 3 cells are selected (as indicated by the
green border around B7:D7). “Trace Precedents” show the arrows only for
one cell (B7).
With Power Formula Auditing, we can select one or many cells for tracing
precedents. The function/button is called Multi-Precedents
Figure 25. Power Formula Audit Buttons
Remove Multi-Precedents
Multi-Dependents
Often, when we are faced with a spreadsheet, we have no idea how the
spreadsheet is organized and where we can start. The following examples
illustrated how an overview can be easily generated.
An overview allows us to have a high level view, and identify where to zoom
in for closer looks.
Example 1: A simplified balance sheet
The next figure shows a much simplified balance sheet. , which shows a
standard format for a company’s balance sheet. This is how it normally looks
without an influence chart.
The next figure shows the same balance sheet with an influence chart drawn
over. The figure is obtained in two clicks. One click selects the entire sheet.
The second click is on “MultiPrecedent” button.
The overview shows 4 components. Each component is a “group” of cells
connected by arrows, and there are no arrows across groups.
This example is from the same corporation. It shows how a worksheet with
one component can show separated components when only part of the
worksheet is selected for analysis.
The next few diagrams show the following:
· The worksheet as it appears normally.
· The entire worksheet with precedents shown (by clicking “Multi-
Precedent” button”
· The partial worksheet with only quarterly columns selected, and with a
click on “Multi-Precedent” button”. It is quite clear that the quarterly
data are connected through the annual total in the rightmost column. But
without the rightmost column, the quarterly columns are separated
components. A partial selection can also present a less cluttered view.
Figure 33. Income Statement
Figure 34. An Overview of the Income Statement
Figure 35. A Quarterly Analysis of the Income Statement
With the Multi-Precedent button, we can get the following figure with
precedent arrows with 2 clicks (select the entire worksheet and click on the
Multi-Precedent button).
This picture shows us the overall structure of the model. For example, there
are many tabular structures and all arrows eventually point to the upper right
corner.
We see that sub-totals within each table are used in the total calculation, at the
top right corner. We also see that budget-actual differences in each table are
not used for the total difference.
For some types of formula, trace precedents and trace dependents may give
results that are not so natural, intuitive or even misleading. Some examples are
discussed in this chapter.
Power Formula Auditing, which builds upon the original trace precedents and
trace dependents, have the same limitations.
Offset formula in Excel
The Vlookup function allows us to search a table based on a value in the first
column, and return a value from some other column along the same row as the
search value. An illustration is given at Microsoft support (VLOOKUP function).
The Hlookup function is a similar function which search based on the first row,
instead of the first column.
The next figure shows the trace-precedents arrows for vlookup and hlookup
formulas.
The arrows indicate the table used in the search, but does not pinpoint the cell
value that is returned. For example, the vlookup formula returns the birthdate in
cell B3.
Trace-precedent does not go into the results for formula evaluations.
In some complex situations, people organize their Excel model across a few
worksheets. It is possible to trace precedents across worksheets. However, it
is very difficult.
Consider a very simple example where one worksheet is used for a company’s
profit model for one year. Over a few years, there will be a few worksheets,
one for each year. In addition, there is a total worksheet that sums number
across the yearly worksheets.
Consider this very much simplified model where the purpose is solely to see
what happens when precedents are traced across worksheets. There are three
worksheets: All-years, 2016 and 2017, as shown in the following figure.
Notice the cross-worksheet formula (=‘2016’!C5+’2017’!C5).
Figure 40. Multi-Worksheet Model
Notice that the precedent arrow is a dash arrow and the beginning of the arrow
shows a table, indicating a worksheet. We can identify the precedent by
carefully double-clicking on the arrow. This will bring up a panel that shows
the precedent cells, as shown in the next figure.
Double-clicking on a cell reference in the panel will bring us to that cell (in its
own worksheet).
Tracing across worksheets is usually very difficult.
10. A Special Chapter for Spreadsheet Teachers
As teachers, when we ask students to develop spreadsheet solutions, how do
we check the correctness of the answers?
Checking other people’s spreadsheet model is well recognized as a difficult
and tedious task.
One way used by teachers to reduce the difficulty is to have a spreadsheet
template where students must fill in formulas and values at specially
designated cells.
The student answers are then compared with the correct solution, e.g., we can
overlay worksheets and check the corresponding values.
Even then, a common problem is that students may simply enter the expected
value instead of the correct formula. For example, a value of 10 may be
entered instead of a formula, say, =A1*B2. The current recommended check is
to turn formulas on and off, and visually check for values where formulas
should be. (The fast way to toggle formulas on and off is ctrl+`)
Power Formula Auditing is very suitable for doing this type of check: a value
when a formula should be. The precedent arrows drawn by “Multi-Precedents”
will show clues. There will be missing arrows, and /or the chain of arrows
will be disconnected.
The next figure shows a table to calculate yearly balance with different interest
rates for each year.
Influence charts are very important for looking at Excel models. Influence
charts, in providing an overview, helps us to understand Excel models.
It is easy and quick to automatically generate an influence charts from an Excel
model. Since the influence chart is generated from the model, errors in the
model will be reflected in the influence chart.
By looking at unusual or unexpected patterns in the influence charts, we can
find potential errors in the Excel models.
A word of caution is needed though. An influence chart can provide many
helpful ways to understand and check spreadsheet models. However, expert
domain knowledge is still needed for a thorough understanding of complex
spreadsheet models. Engineering knowledge is needed to understand
engineering spreadsheet models, and financial knowledge is needed to
understand financial spreadsheet models.
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Appendix A. How to add Power Formula Auditing to
Excel?
There are many “add-ins” software or applications. Excel has very detailed
guides on how to add in an “add-ins” application. Power Formula Auditing is
an “add-ins” application.
The steps are as follow:
· Download the Power Formula Auditing add-in software
(PowerFormulaAudit_1.0.xlam) into any directory in your computer.
· Add the software with the following steps:
o Click the File tab, click Options, and then click the Add-Ins category.
o In the Manage box, click Excel Add-ins, and then click Go.
o The Add-Ins dialog box appears.
The first time a Power Formula Audit button is used in a file, Excel may
prompt you to enable the macros.
The addition steps are further illustrated with the following screenshots:
For more general and detailed information about add-ins and steps to add or
remove add-ins to your spreadsheet, please see this link from Microsoft
support (Add or remove add-ins).
Appendix B. How to uninstall PowerFormulaAudit from
Excel?
The add-ins will be there until you remove it. A simple way to remove
PowerFormulaAudit is to delete the PowerFormulaAudit file from the
directory. If the file is moved to another directory, Excel will not be able to
find the PowerFormulaAudit functions.
Another way is to deactivate the add-in, which will also remove the menu for
power formula audit. The steps are similar to the activation steps in Appendix
A.
The steps to deactivate are:
· Click the File tab, click Options, and then click the Add-Ins category.
· In the Manage box, click Excel Add-ins, and then click Go.
· The Add-Ins dialog box appears.
· In the Add-Ins available box, uncheck the check box next to the add-in that you
want to deactivate, and then click OK.
For more general and detailed information about add-ins and steps to add or
remove add-ins to your spreadsheet, please see this link from Microsoft
support (Add or remove add-ins).
Appendix C. PowerFormulaAudit Menu
PowerFormulaAudit has the following menu buttons, listed from left to right as
shown in the above figure.
Multi-Precedent
Excel’s “Trace Precedents” works only when one cell is selected, Multi-
Precedent works on any number of selected cells, e.g., a single cell, a row /
column of cells, a block of cells, or even an entire worksheet. Where
applicable, every click shows the next level of precedents.
Since this function works on many selected cells at a time, the precedents may
not be strictly one level up. The reason is that the selected cells may already
have a few levels of precedents. In the case where an entire worksheet is
selected, this function will draw all the precedent arrows in the worksheet.
Multi-Dependent
This works in the same way as Excel’s “Trace Dependents”, but allow many
cells to be selected. Each click shows the next level of dependents.
As in the case of multi-precedents, the function does not go strictly by one
level of dependents. The reason is that the selected cells may already have a
few levels of dependents. When an entire worksheet is selected, this function
draws all the dependent arrows.
As illustrated earlier, dependent arrows may look different from precedent
arrows (particularly for box arrows).
Less-MultiPre
Every click reduces the arrows for the furthest level of precedents.
Less-MultiDep
Each click removes the arrows from the furthest level of dependents.
Erase Arrows.
This yellow “eraser” button removes all auditing arrows.
Dr. HC Chan has a PhD from the University of British Columbia. He has
teaching and research experience with spreadsheets. He taught a course on
decision modeling with spreadsheets, for a few years, at the National
University of Singapore. He also provided specialized training about
spreadsheet error detection to practitioners. His research about spreadsheet
users has been published at international journals and conferences.