Introduction to Spreadsheets

and Models
Spreadsheet Modeling (MBA Sem I)
Credits:2
Course Content
• Spreadsheets as tool for thinking with numbers
• Spreadsheets to Models
• Statistical operations in Excel and Spreadsheets
• Linear Programming in Excel and Spreadsheets
A little history
• Use of computers to support business decisions was since the start of
the computers in 1940’s.
• However, in 1970’s the advent of “personal computers”
revolutionized the way business decisions are taken
Much credits goes to

Steve Jobs and Steve Wozniak

However
• Dan Bricklin and Bob Frankston were students
in the late 1970s in Boston.
• Students were asked each week to review
financial ledgers and then recalculate all the
numbers on them based on changes requested
by the professor. Now that meant some very
long hours of work with a handheld calculator.
• Dan and Bob thought maybe there could be a
better way. They purchased one of the new
microcomputers that were available at that
same time, and they wrote a program for one
of them that put the financial ledgers on a
computer screen. The result was the electronic
spreadsheet, VisiCalc, the original killer
application.
• It was the spreadsheet that drove the huge
sales of Apple computers and launched the
personal computer revolution.
From Ledgers to Spreadsheets
• Spreadsheets made the processes required by accountants and
financial analysts more efficient.
• Spreadsheets are not just calculating machines. Here you can play
with ideas, examine ideas from a qualitative perspective.
• Using Spreadsheets one can model future, play around with different
decisions, different assumptions about how business scenarios might
unfold, and think with numbers.
What are models?
• Mental model: A decision-making process we conduct in our heads.
• Visual model: A model in which graphics or diagrams are used to convey
real objects or situations. Examples are a map or a graph.
• Physical model: A model in which physical objects are used to represent
the real objects or situation, usually on a smaller scale. Examples are model
cars and buildings.
• Mathematical model: A model in which quantitative relationships are used
to represent a real situation or phenomenon. An example is a weather
prediction model.
• Spreadsheet model: A mathematical model implemented in the form of a
computer spreadsheet.
Model: A purposeful representation of the key
factors in a situation and the relationships among
them.
Basic Mathematical model

Uncontrollable
inputs
(parameters)
Mathematical model:
set of relationships Outputs
(Spreadsheet formulas)
Controllable
Inputs (Decision
variables)
Spreadsheet modelling process
Basic steps in order to develop an effective spreadsheet model
1. Ironically, the first step is to switch-off your computer and draw a picture
of to better understand the situation. Identify the uncontrollable inputs,
the decision variables, and the outputs. Define the logic necessary to
transform the inputs into the outputs.
2. On paper, sketch out an overall plan for the model. In general, group the
inputs together. Determine where the inputs, intermediate calculations, and
outputs will go. Plan to highlight the key inputs and outputs to make the
model easier to use for what-if analysis. Determine the formulas relating the
inputs to the intermediate calculations and outputs. This can be very simple
for some models (i.e., Profit revenue expenses), or it may be quite
complicated.
Steps…
3. Develop the base case spreadsheet model. Group the inputs
together logically. It usually helps to use a color-coding scheme so the
user can quickly determine what are the inputs and outputs of the
model. Break down the intermediate calculations so that each formula
is relatively simple.
4. Test the spreadsheet model using trial values. Verify the results by
hand, if possible. If you have broken down the intermediate
calculations into relatively simple formulas, this step is much easier.
Steps…
5. Use the model to perform the needed analysis. This may involve a
relatively simple calculation, preparation of a chart, or more
substantial analysis. Two common types of analysis are scenario
analysis and sensitivity analysis.
6. Document the model so that others can easily understand it. Indeed,
ideal spreadsheet models are almost “self-documenting” as a result of
the way you organize and label them.
Evaluating Spreadsheet model
• Correct: A model is correct if it produces the numerically correct
values for the outputs for the current values of the inputs.
• Flexible: A model is flexible if it produces the numerically correct
values for the outputs for any legitimate values of the inputs, without
making any changes to the formulas in the model.
• Document: A model is documented if someone else generally familiar
with the situation can understand the model without having the
model developer explain it in detail. A documented model can be put
away for months at a time, and when viewed again by the modeler, is
readily understandable.
Example 1: Modeling the Break-even
• Relaxo is considering whether to produce a new line of footwear. The
company has considered both the processing needs for the new
product and the market potential. The company also estimated that
the variable cost for each product manufactured and sold is ₹550 and
the fixed cost per year is ₹30,00,000. The selling price is ₹1550 per
pair.
• All example files of the cases discussed in class are available at this
link:
https://drive.google.com/open?id=0BwrkMoGfP6VPRkRMRUNmckxma
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