Continuations

I am going to spend the better part of today building some models in Excel. Much as I love Google Docs, for any serious model I still go back to Excel without regrets. It is fast and versatile and I know it extremely well. I see a fair number of business budgets and financial models built in Excel. Many suffer from the same set of problems:Artificial precision: often there is an attempt to capture every line item down to office supplies – but those generally won’t make or break a business (un...

As someone pointed out in a comment to my previous post, simply using RAND() in Excel gives you independent random variables. That’s perfectly OK for situations where the risks are not closely related to each other. For instance, the if you are trying to project the cost of bandwidth, the uncertainty in the growth of your traffic is likely to be independent from the uncertainty around the price per TB of data. But in many cases, risk is correlated and ignoring that correlation or relying on h...

Following up to yesterday’s post about randomness, Excel provides a very easy tool for modeling probability. Just insert =RAND() into a cell. This will generate a new (pseudo) random number between 0 and 1 each time the spreadsheet is recalculated. For most business modeling one wants to have a discrete distribution of values with a subjective probability distribution. For instance, in projecting out the cap table of a company one might have three possible valuations for the next round – low,...