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Financial Modeling and Circular Referencing

January 3, 2014
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Consider the data used in spreadsheet below.

Donation that you make is tax exempt. That is donation is actually an expense. So I take donations to be 10% of whatever you have after the tax.

Here the blue line indicates circular referencing. As a result, our cells which were supposed to show some values as per the formulas (depicted below), are valued zero. That is the problem that comes with circular referencing.


First of all, what actually is this menace that is termed as circular referencing by MS-Excel? It is any reference within a formula that depends upon the result of same formula i.e. a cell that refers to its own value or the cell which refers to another cell which depends on the original cell’s value, both contains circular referencing.

Now how do we set this situation right?

Microsoft has given excel and a feature within excel on how to remove circular referencing.

1. Go to Excel options in the start button of ‘Excel’

2. Go to ‘Formulas’ section within Excel Options

3. Tick on ‘Enable Iterative calculation

4. Press ‘OK’

And voila! Circular referencing is gone.

As a result, our data sheet will be modified as below.

And that is another Financial Modeling lesson concluded!


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