Introduction to Financial Modelling
Principles of Excel as a Modelling Tool
Excel Operations, Structures and Short-Cuts
Introduction to Excel Functions
Applications of Lookup and Reference Functions
Planning and Building Models for Optimal Decision Making

1.5 Simple Example III: Business Economics

Business Economic Analysis

In a business-related application, the profits of a business could be determined from its revenues and costs, which themselves could be driven by unit prices, volumes, unit costs and fixed costs. The influence diagram could be drawn as follows:

(The colour-coding used here is one where items used only for intermediate calculations are shaded white, with inputs blue, and outputs in green. Some intermediate calculations may also be outputs – such as Sales Revenue – and these are coloured as outputs only.)

One could build a corresponding model in Excel, such as the following:

Note that this Excel model has been presented (in the above) as an interpretation of the influence diagram, but without reference to a specific decision. It could perhaps be used to determine the price that needs to be achieved for the business to reach a specific profit target, or to test the sensitivities to profit as volume varies. However, in practice, it would be ideal for the types of decisions that are to be taken to be established in advance, at least in broad terms, as knowledge of this can be important to determine not only the level of detail required for the model, but also the logic flow.

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