{"id":20664,"date":"2019-06-12T19:09:28","date_gmt":"2019-06-13T00:09:28","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=20664"},"modified":"2024-09-11T19:12:55","modified_gmt":"2024-09-12T00:12:55","slug":"circular-reference-excel","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/","title":{"rendered":"Circular Reference Excel &#8211; How to Find and Fix Them [Tutorial Video] (10:47)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Circular Reference Excel - How to Find and Fix Them<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/#Circular_Reference_Excel_What_Is_It\">Circular Reference Excel: What Is It?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/#Why_You_Should_Avoid_Them\">Why You Should Avoid Them<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/#How_to_Find_Circular_References\">How to Find Circular References<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/#Excel_Circular_Reference_Workaround_How_to_Avoid_Them\">Excel Circular Reference Workaround: How to Avoid Them<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"Circular_Reference_Excel_What_Is_It\"><\/span><strong>Circular Reference Excel: What Is It?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A\u00a0<strong>circular reference<\/strong> in <a href=\"https:\/\/www.microsoft.com\/en-au\/microsoft-365\/excel\" target=\"_blank\" rel=\"noopener\">Excel<\/a> is a case where\u00a0<strong>the input of a cell depends on the output of that same cell.<\/strong> Here&#8217;s a simple example:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22037 size-full\" title=\"Circular Reference Excel - Example\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075511\/Circular-Reference-01.jpg\" alt=\"Circular Reference Excel - Example\" width=\"359\" height=\"82\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075511\/Circular-Reference-01.jpg 359w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075511\/Circular-Reference-01-300x69.jpg 300w\" sizes=\"(max-width: 359px) 100vw, 359px\" \/><\/p>\n<p>The contents of cell Q14 depend on the contents of cell R14 and&#8230; cell Q14.<\/p>\n<p>The input of Q14 depends on its output &#8211; what&#8217;s already there &#8211; which creates a <strong>circular reference.<\/strong><\/p>\n<p>We know the circular reference is there because the bottom-left part of the screen now reads &#8220;Calculate&#8221;:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22038 size-full\" title=\"Circular Reference Excel - Calculate Message\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075511\/Circular-Reference-02.jpg\" alt=\"Circular Reference Excel - Calculate Message\" width=\"412\" height=\"128\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075511\/Circular-Reference-02.jpg 412w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075511\/Circular-Reference-02-300x93.jpg 300w\" sizes=\"(max-width: 412px) 100vw, 412px\" \/><\/p>\n<p>If that does not appear correctly for you in Excel, or you just get a simple error message, go to the Options menu (Alt, T, O on PC or \u2318 + , on Mac), Formulas, and make sure your settings look like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22039 size-full\" title=\"Circular Calculations in Options Menu\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-03.jpg\" alt=\"Circular Calculations in Options Menu\" width=\"826\" height=\"678\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-03.jpg 826w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-03-300x246.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-03-768x630.jpg 768w\" sizes=\"(max-width: 826px) 100vw, 826px\" \/><\/p>\n<p>When this happens &#8211; when the input of a cell depends on its output &#8211; Excel gets &#8220;confused&#8221; about what to do, and it has to start using approximations to make the calculations. For example, here&#8217;s what happens if we enter the number 2 into cell R14:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22040 size-full\" title=\"Circular Calculation - Iterations\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-04.jpg\" alt=\"Circular Calculation - Iterations\" width=\"364\" height=\"89\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-04.jpg 364w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075510\/Circular-Reference-04-300x73.jpg 300w\" sizes=\"(max-width: 364px) 100vw, 364px\" \/><\/p>\n<p>Excel &#8220;loops&#8221; through this circular reference 100 times &#8211; per the settings in the screenshot above &#8211; to calculate the &#8220;answer,&#8221; which is 200 (since 100 * 2 = 200).<\/p>\n<p>A circular reference could be\u00a0<strong>direct<\/strong> &#8211; as it is here, where the cell&#8217;s output directly flows into the cell&#8217;s input &#8211; or\u00a0<strong>indirect<\/strong>.<\/p>\n<p>For an example of an indirect circular reference, let&#8217;s say that Q14 = R14 + S14, and that S14 = Q14 + Q13:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22041 size-full\" title=\"Indirect Circular Reference\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075509\/Circular-Reference-05.jpg\" alt=\"Indirect Circular Reference\" width=\"459\" height=\"175\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075509\/Circular-Reference-05.jpg 459w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075509\/Circular-Reference-05-300x114.jpg 300w\" sizes=\"(max-width: 459px) 100vw, 459px\" \/><\/p>\n<p>Cell S14 depends on what&#8217;s in Q14, but Q14 depends on what&#8217;s in S14.<\/p>\n<div class='code-block code-block-4' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/07054849\/Excel-VBA-Ico.png\" alt=\"Excel & VBA\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Learn Excel Shortcuts, Formulas, Graphs, Data, and VBA for Automation<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a shortcut, formula & formatting machine<\/h4>\n              <p>Excel will be your \u201cnative language\u201d after you finish this course<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Learn the skills with dozens of practice exercises<\/h4>\n            <p>Learn by doing and check your work against the solutions<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Shave hours off your workday with VBA and macros<\/h4>\n            <p>Automate repetitive tasks, format spreadsheets quickly, and more\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/excel-vba\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Excel-VBA-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<p>In real life, circular references in financial models occur most frequently with\u00a0<strong>Interest Income<\/strong> and\u00a0<strong>Interest Expense<\/strong> &#8211; specifically, when you calculate those by using\u00a0<em>average<\/em> Cash or Debt balances rather than beginning-of-period balances.<\/p>\n<p>A company&#8217;s Interest Income depends on its Cash balance, but its Cash balance changes over the year.<\/p>\n<p>So, if you use the Average Cash balance (i.e., =AVERAGE(Beginning Cash, Ending Cash)), then the Interest Income is linked to both of those.<\/p>\n<p><strong>BUT the Ending Cash balance also depends on the Interest Income!<\/strong> More interest earned means the company&#8217;s Ending Cash Balance will be higher.<\/p>\n<p>The same goes for Interest Expense and the Average Debt Balance during the year, but in the opposite direction (lower Interest Expense means more ability to repay Debt, which, in turn, means lower Interest Expense).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_You_Should_Avoid_Them\"><\/span><strong>Why You Should Avoid Them<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You should <strong>avoid circular references<\/strong> whenever possible because they make models and spreadsheets unstable and difficult to modify.<\/p>\n<p>If you try to edit a model where many rows or columns are linked to circular references, for example, deleting a single row or column could cause cascading #REF! errors because of the iterations required to complete a circular calculation.<\/p>\n<p>However, you will encounter circular references &#8220;out in the wild&#8221; in other peoples&#8217; models, so you need to know how to deal with them.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Find_Circular_References\"><\/span><strong>How to Find Circular References<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If you go back to the Options menu, Formulas, and you\u00a0<em>un-check<\/em> &#8220;Use Iterative Calculations&#8221; Excel will display an error message and blue arrows that show all the circular references on your current sheet, along with the exact cells at the bottom of the screen:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22042 size-full\" title=\"How to Find Circular References\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-06.jpg\" alt=\"How to Find Circular References\" width=\"514\" height=\"153\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-06.jpg 514w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-06-300x89.jpg 300w\" sizes=\"(max-width: 514px) 100vw, 514px\" \/><\/p>\n<p>You can then go into these cells and change the formulas to remove the circular references.<\/p>\n<p>If your file or spreadsheet has\u00a0<em>dozens<\/em> or\u00a0<em>hundreds<\/em> of circular references, then it may be more difficult to do this because there will be blue arrows all over.<\/p>\n<p>In that case, you will have to go line-by-line and cell-by-cell to fix these. There isn&#8217;t really a &#8220;more efficient&#8221; way to do it because deleting all the circular formulas manually will create even more problems.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Excel_Circular_Reference_Workaround_How_to_Avoid_Them\"><\/span>Excel Circular Reference Workaround: How to Avoid Them<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In financial models, the best way to\u00a0<strong>avoid<\/strong> circular references is to build in a &#8220;switch&#8221; that lets the user toggle between Average Balances and Beginning Balances when calculating items like Interest Income and Interest Expense.<\/p>\n<p>In practice, the added &#8220;accuracy&#8221; from using Average Balances is so small that it&#8217;s irrelevant in nearly all cases.<\/p>\n<p>We recommend the following setup as a workaround to this problem:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22043 size-large\" title=\"Circular References - Average Balance Switch\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-07-1024x155.jpg\" alt=\"Circular References - Average Balance Switch\" width=\"1024\" height=\"155\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-07-1024x155.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-07-300x45.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-07-768x116.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075508\/Circular-Reference-07.jpg 1057w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>Then, whenever we calculate Interest Income or Interest Expense in the model, we use an IF statement to check the value in this named cell (1 or 0) and then use the Average Balances or Beginning Balance:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-22044 size-full\" title=\"Interest Income - Circular Switch\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075507\/Circular-Reference-08.jpg\" alt=\"Interest Income - Circular Switch\" width=\"991\" height=\"777\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075507\/Circular-Reference-08.jpg 991w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075507\/Circular-Reference-08-300x235.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2019\/06\/19075507\/Circular-Reference-08-768x602.jpg 768w\" sizes=\"(max-width: 991px) 100vw, 991px\" \/><\/p>\n<p>Setting this named cell to 0 will force all formulas to use the Beginning Cash or Debt Balances, meaning that there will be no circular references, and the model should remain stable.<\/p>\n<p>We follow this practice in the examples and exercises in our <a href=\"https:\/\/breakingintowallstreet.com\/excel-financial-modeling-fundamentals\/\" target=\"_blank\" rel=\"noopener noreferrer\">Excel &amp; Financial Modeling Fundamentals course<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>You\u2019ll learn about circular references in Excel formulas in this lesson, including why they come up, how to deal with them properly, and why you should generally avoid them in financial models.<\/p>\n","protected":false},"featured_media":29300,"template":"","class_list":["post-20664","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-excel"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/20664","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/29300"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=20664"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}