Introduction to Financial Modelling
Principles of Excel as a Modelling Tool
Common Modeling Structures (I)
Further Operations and Shortcuts
Excel Functions (I): Information and Numerical Aggregation
Excel Functions (II): Conditionality, Aggregations and Arrays
Common Modelling Structures (II)
Excel Functions (II): Lookups and Referencing
Model Planning and Best Practices
CUTZ or ... intrducton to rest of program....and clisoing remarks
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1.7 Simple Example III: Business Economics

The analysis of business economics is an important application area for modelling. To take a simple example, we can consider that theĀ profits of a business are determined from the revenues and costs. These items could themselves be determined by assumptions about unit prices, volumes, unit costs and fixed costs:

(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 colored as if they are outputs only.)

The corresponding model in Excel could be:

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.

Further – depending on the specific decision(s) to be taken – it may be appropriate to add more detail. For example, the (total) Sales Revenue could be made up as the sum of the sales for each individual product (each calculated from its own unit price and volume sold). Additionally, a time axis could be added, to capture growth or changes in prices and volumes (in aggregate, or for each product), and so on.

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