The essence of modelling is the use of formulas to express the relationships between the variables.
The simple model for Sales Revenue in the previous chapter can be developed further, in order to include the cost and profit of the business. For example, the Total Cost could be made up of costs which are fixed (such as some staff costs and overheads) and those which vary with volume (such as raw materials) and Profit would be the Sales Revenue less the Total Cost.
The corresponding Excel model requires the use only of standard arithmetic operations. In words:
The image below shows an influence diagram for this situation:
and the corresponding Excel model is shown here:
(Here, the diagram and model each follow a common colour-coding scheme: Blue text and grey fill for inputs, black text without fill for intermediate calculations, and black text with green fill for calculations which are also considered as outputs.)
Before building models, one should therefore have a mechanism to conceive and plan for the variables to be included, the flow of their logic, and so on.