Topic 01

University of Kelaniya, Sri Lanka
BFIN 22513 / BBFE 22513 – Computer Modelling in Finance
Topic 01 – Introduction to Spreadsheets Functions and Basic Financial

Calculations
Mr. Jayanath Samarawickrama
B.Sc. Bus. Admin. (Information Systems) (Sp.) (USJ), M.Sc. (Computer Science) (USJ), MCS (SL)
Lecturer
Department of Finance
E-Mail – aravindaj@kln.ac.lk
BFIN 22513 / BBFE 22513 – Computer

1
Modelling in Finance
Learning Outcomes
• Understand financial modelling and its
usefulness in financial decision making
• Understand the spreadsheets functions needed
for financial decision making
• Identify the basic financial calculations

2
Topic Outline
• Financial Modelling Introduction
• Spreadsheet Basics
• Spreadsheet Formulae & Functions

3
Financial Modelling
Introduction

4
What is a Model ?
• A model can come in many shapes, sizes, and

styles.
• It is important to emphasize that a model is not
the real world but merely a human construct to
help us better understand real world systems.
• In general all models have an information
input, an information processor, and an output
of expected results.

5
What is a Model ?
• Key features in common with the development

of any model is that:
simplifying assumptions must be made;
boundary conditions or initial conditions must be
identified;
the range of applicability of the model should be
understood.

6
What is a Model ?

7
What is a Financial Model ?
• A financial model is a forecast for a specific

business of key financial information,
usually done in MS Excel, that uses a set of
assumptions, in order to see the financial
effects of decisions.

8
What are the benefits of a
financial model?
• Accounting packages are historical, while business
owners and managers need forward looking
information, to make decisions.
• Financial models are key to any financing decision – a
bank will usually want to understand future cash flows
• Key to any major capital investment – we want to
understand the return on capital invested
• Important in a sale of the business or raising of capital
– investors want to understand future profits and cash
flows to estimate future share price and dividend
stream

9
Key financial information
• Focuses on key financial aspects –
cannot contain all information; it needs to
summarise information

10
Typical key information (historical)
• Sales volume (units or monetary)

• Product costs
• Variable costs – costs that vary depending on
sales volume (ex. sales commission or delivery
expenses)
• Fixed costs – costs that do not vary when sales
volumes change (ex. rent)

11
Typical key information (historical)
• Sales growth – price and volume

• Gross profit margins. This can be overall, split
per customer group or product group
• Cost as % of sales – useful for variable costs
• Inflation
• Interest rates
• Tax rates

12
Typical Assumptions
• Sales growth – price and volume
• Gross profit margins.
• Variable costs (eg.: % of sales)
• Fixed costs – current cost + inflation
• Planned capital expenditure (new machinery)
• Planned changes – new staff, new premises
• Interest rates
• Tax rates
• Constraints – which is how much more you can sell or manufacture given the
current business eg given your current factory size and layout, you can only
expand by another 10%

13
Modelling Process
Determine
Key Ratios
Gather and Drivers Build
Determine Build Input Build Output
Historical of the Calculation Audit
Assumptions Sheets Sheets
Data Business Sheets

14
Spreadsheet Basics

15
Loading Excel
• Double click the Excel
icon on the desktop (if
you have this)
OR
• Click on
Start
All Programs
Microsoft Office
Microsoft Office Excel

16
The Startup Window

17
What All The Different Parts Mean
Worksheets A worksheet consists of a grid containing 256 columns and 65,536 rows.
The columns are labelled A, B, C, etc. The rows are labelled 1, 2, 3, etc.
Cells The address of the cell in the top left-hand corner is A1 because it is in
column A and row 1. You can type a number, label or formula into a cell.
Active cell When you click or type into a cell, this is surrounded by a black border,
making it the active cell. When you view a blank file, this will be cell A1.
Rows and If you click on the column or row headers (the letters or numbers to the top
columns and left of the worksheet area, the entire column or row will be highlighted.
Workbooks Workbooks contain several blank worksheets usually named Sheet1,

Sheet2, Sheet3, etc which are shown on the sheet tabs at the bottom.
Task pane This area lists workbooks recently opened and other options. You can
close this by clicking on the Close icon in the top right hand corner.

18
Entering Data
• As you type in text
• Click on the cell where you Excel may type in a
want the data to appear and previous entry
type in the data
• To type data into the next cell, • If you carry on typing
press the right arrow key (or this will disappear
click in the cell)
• If you press the Enter key the
active cell will move to the cell
below
• Note how text is automatically
aligned to the left of the cell
and numbers are aligned to
the right
19
Editing Data
• First Way • Second Way
• Click on the cell to be changed • Click on the cell to be changed
• The cell contents will appear in • Type in the new text and press
the Formula bar the Enter key
• Move the insertion point to the • The old text will disappear and
appropriate place be replaced by your new text!
• Press Backspace or Delete to
delete text or type in text to be
inserted
• Press the Enter key to confirm
the change

20
Inserting/Deleting Rows & Columns
• To delete a row, right click the

row number and left click Delete
(see below)
• To insert a row, right click the
row number and select Insert
• To insert a spreadsheet title,
highlight row 1, right click and
select Insert – type the title in the
top row
• Handy Hint: to insert or delete a
column, right click the column
header and select Insert or
Delete as appropriate
21
Saving Workbooks
• Save As dialog box

22
Closing a Workbook
• To close a workbook without closing Excel,
click Close on the File tab.
• With only one workbook open, click the Close
button on the title bar to close the
workbook and exit the program at the same
time.

23
Spreadsheets
Formulae &
Functions

24
Formulae • You may find it easier
to use the keys on
• The best part of the right hand side of
spreadsheets is formulae
which make it possible to the keyboard to type
perform calculations the symbols!
automatically
• You can add, subtract,
multiply and divide cells
+ Add
• All formulae start with an
equals sign - Minus
• This tells Excel that you * Multiply
are going to insert a / Divide
formula as opposed to
text or numbers
25
Formulae
• A formula is a sequence of values, cell
references and operators that produce a new
value.
= E8 + 3*(E10 - E11)
• Formulas always start with an equal sign =
• In addition a formula can also contain built-in
functions like SUM, AVERAGE, IF, COUNTIF,
etc. =Sum(A2:A8)*2

26
Formulae
Formulas contain two types of components:

• Operators: Operations to be performed
Arithmetic operators: * / + - ^
Relational operators: >, <, <=, >=,< >,=
• Operands: Values to be operated on
Addition
= B2 + 5 Operator
Operands

27
Precedence of Operators
 ( ) Parenthesis is a special operator that
forces evaluation of the expression inside it
first
 Exponentiation (2^3 8)
 Arithmetic operators: Multiplication & Division
 Multiplication & Division have equal precedence and are evaluated
from left to right
 Arithmetic operators: Addition & Subtraction
 Addition & Subtraction have equal precedence and are evaluated
from left to right
 Relational operators have a lower
precedence than arithmetic operators

28
Selecting Cells
• Click in the intersection of row

and column headers to select
all cells
• Click on a column header
to select a column
• Click on a row header to select
a row
• To select non adjacent cells hold
down the Ctrl key whilst you
click on cells or column or row
headers (the last cell clicked will
appear white)
• When you select a range of cells
the first cell will be colored
white, the rest pale blue
29
Entering Formulae
• Click where you want the The formula is displayed in the formula
bar
result to appear
• Type an equal sign
• Type the first cell
reference (eg A2)
• Press + - * / as
appropriate
• Type the second cell
reference (eg A3) The result of the formula appears in
the spreadsheet
• Press the Enter key to
confirm
30
Automatic Recalculation
• If you have entered your • If either of these
formula correctly and if messages appear,
you change a number, check that your
Excel will recalculate!
formula points to the
• Don’t insert a space into a right cells and that the
cell used in a formula
otherwise you will receive cells contain the right
an error message information!
#VALUE!
• Similarly if you try to divide
a cell by 0 or an empty
cell, #DIV/0! will appear
31
Enter Formulae By Pointing
• Instead of typing in a formula
such as =A2+A3, you can use
the mouse to point at the cells
in the formula.
• Click in the cell to contain the
formula
• Type an equals sign
• Click on cell A2
As you click on the cells,
• Type a plus sign notice how Excel inserts
the cell reference!
• Click on cell A3

32
Adding a Column of Numbers
• Click in a cell below the column of
numbers you want to add up
• Click the AutoSum icon once
Excel will guess which numbers
you want to add up.
• If Excel doesn’t select the right
cells, select the cells you want to
add up and press Enter!

33
Functions
• A function is a formula
used in a calculation
• Excel has over 200
functions to help with
many applications
• You will learn about:
• =SUM
• =AVERAGE
• =MIN
• =MAX
• =COUNT

34
The SUM Function
• Although you can use
the AutoSum button to
add up a column or
row of numbers, you
can also type the
function
• Click where you want the total
to appear
• Type =SUM(
• Click and drag the cells you
want to add up
• Press the Enter key

35
The AVERAGE Function
• Use this to work out
the average of a range
of cells
• Click where you want the result
of the function to appear (eg
cell B13)
• Type =AVERAGE(
• Select the cells you want to
find the average of
Watch out: any blank cell
formatted as Number will upset
your average!

36
The MAX and MIN Functions
• To display the highest
number in a range of
cells:
of the function to appear (eg cell
B15)
• Type =MAX(
• Select the range of cells
• To show the lowest

number, replace
=MAX( with =MIN(
37
The COUNT Function
• To count the number of
entries in a range of
cells:
of the function to appear (eg
cell B19)
• Type =COUNT(
• Select the range of cells
• Note the COUNT function only
counts cells that contain a
number – it will ignore blank
cells or cells which contain text!

38

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University of Kelaniya, Sri Lanka

BFIN 22513 / BBFE 22513 – Computer Modelling in Finance

Topic 01 – Introduction to Spreadsheets Functions and Basic Financial

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• Spreadsheet Formulae & Functions

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• A model can come in many shapes, sizes, and

BFIN 22513 / BBFE 22513 – Computer

• Key features in common with the development

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• A financial model is a forecast for a specific

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• Sales volume (units or monetary)

BFIN 22513 / BBFE 22513 – Computer

• Sales growth – price and volume

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

Workbooks Workbooks contain several blank worksheets usually named Sheet1,

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• To delete a row, right click the

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

Formulas contain two types of components:

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• Click in the intersection of row

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

BFIN 22513 / BBFE 22513 – Computer

• To show the lowest

BFIN 22513 / BBFE 22513 – Computer

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