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Taming the Goal Seek

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Goal seek is one of the most powerful tools in Excel. It can be useful in a wide range of situations.

This guide will show you how to get the best from goal seek and present some tips to make our lives easier while working with it.

This guide assumes that you know a bit about how goal seek works.

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Taming the Goal Seek

1. 1. Financial Modelling HANDBOOK financialmodellinghandbook.com GOAL SEEK Taming the
2. 2. ABOUT THE FINANCIAL MODELLING HANDBOOK Financial modelling should be collaborative. Collaboration reduces error, speeds up development time and lowers cost. The Financial Modelling Handbook is a collaborative, crowd-sourced guide to building better financial models using the FAST Standard. www.financialmodellinghandbook.com/contribute
3. 3. Dhruva Poonia manages F1F9’s modelling team. He has been working with FAST models since 2006 and has a great breadth of experience of financial modelling for projects across different sectors. financialmodellinghandbook.com Financial Modelling HANDBOOK DHRUVA
4. 4. Goal seek is one of the most powerful tools in Excel. It can be useful in a wide range of situations. This guide will show you how to get the best from goal seek and present some tips to make our lives easier while working with it. This guide assumes that you know a bit about how goal seek works. If you don’t, check out this guide from Microsoft or this useful overview. financialmodellinghandbook.comFinancial Modelling DOWNLOAD THIS GUIDE AND THE ACCOMPANYING EXCEL EXAMPLE HANDBOOK GOAL SEEK Taming the
5. 5. financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK In this scenario, you have a fixed initial outflow of USD 100,000 and you have to find the fixed quarterly inflow over a fixed time period that will yield an annualized return of 12.00%. Let’s also start with an assumption of USD 10,000 for the periodic inflows (you can start with any number since the goal seek is going to change it). Keep in mind that a very small number will result in a #NUM! error. It is best to start with a number big enough to let Excel calculate an internal rate of return using the IRR function.
6. 6. 1 financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK – TIP NO. 1 Create a check to highlight when the target IRR is not met Once you have the basic logic developed to calculate the required output, it is important to see if the current assumptions are resulting in the required output or not. This can be achieved by creating a check which monitors the difference between the calculated and target results – and can highlight if you are not achieving your target. Remember that Excel calculates to 15 significant figures, and there are likely to be minor differences. You should not expect – and therefore not check – for the difference to be a perfect zero.
7. 7. financialmodellinghandbook.comFinancial Modelling HANDBOOK TIP NO. 1 (CONTINUED) To deal with this issue, you can set up an input for an appropriate tolerance level. Write the formula so that if the difference is greater than the tolerance then it should show that as an error. If you use a simple A > B for this check, then the formula won’t flag an error where the difference is negative. Use the ABS function to test for the absolute difference between the calculated difference and the tolerance. 1
8. 8. financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK – TIP NO. 2 However, in many cases goal seek will not be able to find a solution. The reason for this lies in the method that goal seek uses to find a solution. We will consider that next. Do not goal seek on the check It can be tempting to set up the goal seek to get the check to go to zero. 2
9. 9. financialmodellinghandbook.comFinancial Modelling HANDBOOK TIP NO. 2 (CONTINUED) When searching for a solution, Excel needs to know if the options it is trying are going in the right direction and getting closer to – or further away from – the target. If you run a goal seek on the check, Excel will not be able to determine if it is going in the right direction because of the ABS function. 2
10. 10. financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK – TIP NO. 3 Do not goal seek on ABS difference. It is good to use absolute numbers for checking purposes or to show the difference from presentational point of view. It is not a good idea to target the absolute of the difference for the Goal Seek. This is for the same reason that we didn’t goal seek on the check. If you use Goal Seek to target an absolute difference, as it iterates it may not be able to establish if its attempts are taking it in the right direction to find a solution. 3
11. 11. 4 financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK – TIP NO. 4 Amplify for precision Even when you know which cell to run the goal seek on, the results of a goal seek may not reach the target value.
12. 12. 4 financialmodellinghandbook.comFinancial Modelling HANDBOOK TIP NO. 4 (CONTINUED) You should not set your expectations too high on this precision – sometimes if you seek too precise an output (by using a very high multiplier on the difference), goal seek might not be able to find a solution and will then change its direction of guesses. This may lead to a situation where goal seek is unable to generate a result. To solve this issue, you need to amplify the output on which you set the goal seek. When the goal seek finds a solution, you will have a more precise result than with the non-amplified output.
13. 13. financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK – TIP NO. 5 Help Excel – start with an intelligent guess Since the goal seek works on guesses, you can help it by providing a good start position. This will not only help you increase your chances of getting a result from goal seek, but will also reduce the number of iterations required to find a target value. This can be important if you are working on a big financial model which has several goal seeks and might take time to recalculate. Start with a number that does not result in an error on the target output cell – otherwise goal seek will not be able to start. 5
14. 14. 6 financialmodellinghandbook.comFinancial Modelling HANDBOOK USING GOAL SEEK – TIP NO. 6 Create a macro to run a goal seek more easily and quickly It is always a good practice to keep your inputs in one place (we use the InpC sheet in the file attached). Note that in the current example the periodic inflows inputs are on the calculation sheet itself. I did this because I was building up the calculation and testing the goal seek. It made it easy for me to work with everything in one place.
15. 15. financialmodellinghandbook.comFinancial Modelling HANDBOOK TIP NO. 6 (CONTINUED) I would not leave a file like this. Instead, I would relocate the inputs to the input sheet and create a simple macro to perform the Goal Seek. If you need help with relocating inputs, click the image to the right to see the guide on relocating inputs. This macro can then be assigned to a button, which can be placed wherever the user finds it to be most useful (e.g. right next to the ‘Annualised vs target IRR – Check’). This will not only make sure that you are following the good practice of modelling, but will also make it easy to get the required result with a single click. 6