Today was the day where several days’ worth of learning all came together!
I began the day by briefly reviewing financial ratios with Mrs. Spurgeon. We talked again about which financial ratios would be the most important, and even added new terminology and ratios to the list. This helped me make sure that I knew the basics, and would be ready to apply them for actually building the model.
I went back to the sources of income and expense that Mrs. Spurgeon and I had brainstormed on the first day of the independent study. These sources of income and expense are very important because without this information, I can’t calculate an operating gain/loss (also called net income) that I can use in my model. I also did some research (along with talking to Mrs. Spurgeon) about what data would be necessary for other important financial data categories so that I could know what other data would be important in order to make calculations. For example, I had to research what goes under the financial term “total liabilities,” which includes everything from accounts payable to long term debt and even loans payable.
I then began to build my model by first defining the parts of a financial ratio in my spreadsheet so that I could later use it to directly calculate that ratio within the spreadsheet. For example, the current ratio is defined by dividing current assets by current liabilities, so in order to find the current ratio, I first needed to find amount of current assets and current liabilities. But with the exception of accountants and other professionals who keep close tabs on financial information within an organization, few people can quickly find the amount of current assets and current liabilities of their company or organization. I needed to make the model as easy to use as possible, so I created formulas to calculate the total amount of current assets and total amount of current liabilities. As it works right now, the model that I’m building instructs the user to input data that is linked to calculating the amount of current assets and current liabilities; some examples of data that are needed include the amounts of all accounts receivable, cash, any money due from the government, all accounts payable, and accrued liabilities. If the user can simply find these data and input them into the model, the spreadsheet will calculate the current ratio for the user by using the information received to calculate the current assets and divide them by the current liabilities. In general, the intention when building a model is to make it easy to use, allowing users to quickly get information from the data they have without the need to do complicated calculations. All of the calculations are determined by formulas, which link cells together and can almost instantly find results based on the data it is given.
Additionally, I organized all these subparts of the financial ratios into the format of a balance sheet, making each of the subparts easy to find and the model easier to use. I could have created an interface that tells the user to input data all over the place on a spreadsheet, but that would be silly, given that most users are familiar with the look and feel of a balance sheet. Finally, I did more research in order to make sure that I wasn’t missing any subpart that should be included in any of the sections of the balance sheet.
Here is a more detailed breakdown of what I learned in the days leading up to now, and how it helped me today:
Understanding of sources of income and expenses for an independent school: 1-4-2016: The Beginning
Basic understanding and applications of financial ratios: 1-5-2016: Finance 101
Important financial metrics to keep in mind when evaluating a business expansion: 1-6-2016: Amy Yustick, Dana Holding Corporation
Use of table tools in order to easily display data in the spreadsheet: 1-7-2016: Microsoft Excel 2007
Tracing precedents and dependents to easily find and check errors: 1-7-2016: Microsoft Excel 2007
Basic uses of formulas for calculations in the spreadsheet: 1-7-2016: Microsoft Excel 2007 and 1-8-2016: Macros, Formulas, and Data Validation
It felt so good to be able to finally understand how everything would come together, and as a result, I am more excited about this project than before. I will continue working on my model tomorrow, adding more formulas and ratios to the spreadsheet. The more work I do, the more fun it gets!
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