Excel can detect and warn users about circular references, which occur when a formula refers back to its own cell, directly or indirectly. Enabling iterative calculation mode in Excel options allows formulas with circular references to calculate correctly by evaluating references repeatedly up to 100 times. While circular references can sometimes be necessary, they should generally be avoided by reworking formulas when possible. Users can locate all circular references in a workbook by going to the formula ribbon and clicking on the error checking options after receiving a circular reference warning message.

1. A round-up on Circular References
Posted on September 16th, 2010 in Learn Excel - 33 comments
Here is a little experiment to freak out excel.
Go to cell C3 and write =C3 and press Enter. Excel would throw up nasty
message saying, “Microsoft did not know what to do. We have a sent a support
engineer to your home, but he is stuck at the round-about near your house.”
Well, not really. But what you did when you wrote the formula =C3 in
cell C3 was, you created a circular reference.
What is a Circular Reference & why use them?
A circular reference is created when you refer to same cell either directly or
indirectly.
We use circular references when we need circular references.
Excel Circular Reference Example:
For eg. (borrowed from John Walkenbach’s Excel 2010 Bible), lets say you run a fictitious company
named Sky is the Ltd.
And you have a strange policy of donation 10% of your profits after tax to charity.
But, in your country, charity donations are tax exempt (they are expenses).
So charity = 10% * after tax profits
after tax profits = (revenues - expenses - charity)*(1-tax rate)
By definition, charity refers to after tax profits, which refers to charity, thus creating a
circular reference.
Now, how would you find out how much to donate to charity?
Simple, we write formulas with circular references, like this:

2. But wait, just when you press enter after writing the formulas, Excel would scream bloody
and curse your entire family for having a circular reference in your worksheet.
Enabling Iterative Calculation Mode
You must enable what they call iterative calculation mode before the formulas work. For this we
must go to Excel Options.
In latest versions of
Excel,
Click on Office button
Go to Excel Options, this
is analogous to opening
the bonnet of your car,
but just a bit more
confusing.
Locate the “Formulas” on
the left, click on it
Now, check the “Enable iterative calculation”. This way you are telling Excel to evaluate
references iteratively, up to 100 times (default).
Click ok, close the bonnet. That is all.
In per-historic versions of Excel,
Go to Menu > Tools > Options > Calculation Tab
Check Iterative Calculation box. (see image)
Once you do this, your formulas will work nicely and you will find that the required charity donation to
be made.
How to avoid Circular References?
As you can understand circular references are a pain in cell. You may want to get rid of them
altogether. Thankfully, with careful inspection and a mug of coffee, you can reduce most circular
references to simple formulas. For eg, in the above case, we can calculate charity amount directly by

3. using the following equations.
But, keep in mind that, in few cases, circular references may be required. For eg. if you want to add
timestamps to your workbook.
How to locate Circular References?
Do you know that you can find all the circular references in a workbook?
Whenever you see circular reference warning message, just go to formula ribbon and click on error
checking options. You can see all the circular references there.