Session 3 Managerial Spreadsheet Modeling -- Prof. Juran1.

Session 3

Managerial Spreadsheet Modeling -- Prof. Juran 1


Principles of Spreadsheet DesignDeveloping Spreadsheets for OthersPrinciples for Spreadsheet Layout

– Accounting vs. “Live”– Hyperlinks– Design Consistency– Parameters, Arcs

Outline


• Spreadsheets are a specific (non-procedural) type of computer language.

– Procedural: When calculations need to be sequential.

• Programmers learn the standard computer languages (C++, Java, Visual Basic) in formal classes.

– The principles of programming style are emphasized.– Powerful debugging support systems help reduce

errors.

• Managers (typically) learn Excel either through informal training, or else on their own, as needed.

– Little or no training in debugging, design, or readability.

Spreadsheets are Computer Programs


• What sorts of efforts could be put into spreadsheet design?

– Documentation (titles, cell labels, comments, external manuals, change tracking, chronological list of changes made)

– Ease-of-use features (graphical controls, input prompting, macros)

– Error prevention (auditing, cell protection, data validation)

• How much effort should be put into design? “It depends” on how it is to be used.

– By the author, or by others?– One-time, frequent, or infrequent use?– Modified by others, or just used?

Spreadsheets for Others


• These are rules-of-thumb for communicating effectively through spreadsheets.

– Different rules will of course be appropriate in different situations.

• Accountants have their own standards.– More focused on printed spreadsheets.

• We’ll focus on “live” spreadsheet use.– “Here’s a spreadsheet with my analysis. Play around

with it, and let me know what you think.”– Using a spreadsheet as part of a presentation.

Spreadsheet Layout Principles


• Divide the spreadsheet into multiple sections.– Introductory– Data (Input)– Data Validation– Model– Results (Output)– References

Accounting Standards for Spreadsheet Layout


• Better suited for a procedural computer language than a spreadsheet.

• More appropriate for printed (black and white) output.

• Too formal and strict!– The reason why spreadsheets are so popular is that

managers can calculate what then want, how they want, when they want.

– Conflict: Sarbanes-Oxley requires each CEO to confirm that his/her firm’s financial system has been “effectively controlled.”

Limitations of the Accounting Layout Standard


• Make (a section of) the first worksheet an introduction to the spreadsheet.

– Purpose, explanations, instructions– Explicit statement of assumptions made– Identify sources of data– Author, date created, and date last modified– Table of contents / List of worksheet names

– With hyperlinks, to navigate within large spreadsheets.– Usually OK to just specify much of this information in

File | Info | Properties | Show Document Panel — as long as you’re sure that your audience would know to look there

Introductory Sheet


• To write in paragraphs:– Widen the column,– Turn off the gridlines,

– Under Page Layout | Sheet Options | Gridlines, uncheck the View box, -or-

– Under View | Show, uncheck Gridlines– Let the text wrap around

– Choose Home | Alignment | Wrap Text

Introductory Sheet


• Recent research has shown that people read longer lines (100 characters) faster, but prefer shorter lines (45 – 72 characters).

Introductory Sheet


• Choose Insert | Hyperlink, ctrl-K, or right-click Hyperlink.

• In the “Link to” choices on the left, click the “Place in This Document” button.

• Identify the worksheet and cell reference you want to go to.

– Cannot link to charts.

• Change “Text to display” to something more meaningful than the address.

• Click on the ScreenTip button, if you want to add a message that appears when you hover over the hyperlink.

Inserting Hyperlinks


• You can even add your own screen tip:

Inserting Hyperlinks


• Can add hyperlinks to any picture.– Choose Insert, and then Picture from the Illustrations

group.

• Some button-ish looking pictures let you add text.

– Choose Insert, and then Shapes from the Illustrations group, and then Bevel from the Basic Shapes group.

– Choose Insert, and then Shapes from the Illustrations group, and then Rectangle from the Rectangles group. Right-click to Format Shape, and add the Shadow at the top left.

– Attach hyperlinks to invisible (no line, no fill) boxes, placed on top of (say) a map.

Hyperlinks from Pictures

ACC


• Internally, within the spreadsheet– Use the same orientation (horizontal or vertical) for any

series (e.g., locations, time, departments, individuals) throughout your document.

– Stick with one style (font type, size, etc.).– Format all of your numerical cells.

• Externally, with standard practice– Time is the horizontal axis.– Revenues before costs.– Assets before liabilities before equity.– Colors for gender or political affiliation.

• Externally, with your organization’s design requirements.

Design Consistency


• First organize the data you will need, and then build your model around it. Spreadsheet layout should be determined by its needs.

• Use more rows than columns.• Subdivide your worksheet into smaller sections.

Separate the sections from one another with borders and blank space.

• Use physical proximity (or color, shading, borders, and fonts) for logically related cells (e.g., all input parameters; left-hand sides and right-hand sides of constraints).

“Live” Spreadsheet Layout


• Choose Formulas, and then the Formula Auditing group

– Show the precedents or dependents for a cell.– Alternatively: Ctrl-[ and Ctrl-]

• Unless there is a good reason not to, organize the data as you would read: (left right, top bottom).

• Make the blue arcs as short as possible.

Precedence Arcs

Spaghetti: Better:

1

2

3

4

A B C DInches Feet Yards

Length 178 14.8 4.9Width 388 32.3 10.8Area 69064 479.6 53.3

1

2

3

4

5

6

7

A B C D EYards of Carpet to Buy 53.3 Area (inches) 69064

Area (feet) 479.6Room Length (ft) 14.8Room Width (ft) 32.3 Yards

4.9Room Width (inches) 388 10.8Room Length (inches) 178


• Generally a bad practice.– Often caused by an incorrect cell reference.– Planned circularity might mask errors.– Often possible to avoid, with little effort.– Cannot use with simulation (@Risk).

• Common in constructing pro forma financial statements.

Circular References


Circular Reference Example

B3=B6*B4 (B3 depends on B4)

B4=B1+B2+B3 (B4 depends on B3)

1

2

34

5

6

A BTotal Current Assets 5,612.0$ Property, Plant, and Equipment (Net) 8,060.7$ Other Long-Term Assets 569.7$ Total Assets 14,242.4$

Other Long-Term Assets (% of Total Assets) 4%


• Explicitly define parameters (constants) in their own (properly labeled) cells.– Use different formatting (text or background color) or

location, so that they’re easy to find.– Identify source and date in a comment.

– E.g., “Best estimate from Corporate Planning, 1/19”

• Differentiate between parameters that are frequently and infrequently modified.

Parameters and Equations


• Never, ever embed constants in equations!– Exception: “True” constants (e.g., 5280, 24)– Possible exception: Parameters embedded in a single cell

– E.g., 8*5*52 = 2,080 hours/year would be OK as long as no other cell depended on 8 hours/day, 5 days/week, or 52 weeks/year.

– 8*(5*(52-3) – 9) = 1,888 definitely needs a comment.– True evil: define constants and then also embed them!

• Minimize the number of “volatile” Excel functions you use.

• Volatile functions are always recalculated, even if none of their precedents have changed.

• Examples: Now(), Today(), Rand(), Offset(), Indirect(), Info(), Cell()

Good Equations


• Eliminate links to other workbooks.– Data | Connections | Edit Links

• Avoid “killer” over-complicated equations– Very difficult for anyone else to understand what’s going

on, even with tons of commenting.– There are millions of cells in the spreadsheet; just break

the equation into smaller components.– Avoid array (CSE: control-shift-enter) functions.– Use Alt-enter to put line returns into your long equations.

Good Equations


• Make equations easy to read.– Eliminate unnecessary parentheses.– Eliminate the name of the current worksheet from the

equation.– Insert spaces after commas, and before and after

equations.– Example: =(If(C3<=4,Sheet1!B10,4+Sheet1!B10))

• Make a recurring calculation only once in a workbook.– Use a “stub” to copy its value into other worksheets.– Add a hyperlink to the stub in order to make it easy to

trace back.– Link back to the original calculation; don’t “daisy chain” it

to intermediate stubs.

Good Equations


• Putting your name under File | Info | Properties | Show Document Panel | Author.

• Widening the column, turning off the gridlines, and allowing the text to wrap.

• Inserting hyperlinks into both cells and pictures.

Hands-on Practice

Session 3 Managerial Spreadsheet Modeling -- Prof. Juran1.

Documents

Transcript of Session 3 Managerial Spreadsheet Modeling -- Prof. Juran1.