What is a circular reference?

They can slow the financial model down as Excel will always be calculating. Future circular reference errors that are unintended could go unnoticed. I was working on a formula that had an unintended circular referenced. There was no solution, so Excel got stuck in a loop trying to solve the impossible, and my computer slowed down to a snail's pace. Circular reference in excel means referring to the same cell in which we are working, circular reference is a type of pop up or warning displayed by excel that we are using a circular reference in our formula and the calculation might be incorrect, for example in cell A1 if I write a formula =A1.2 this is a circular reference as in inside the. By default, Excel will not allow circular references, which is why you receive warnings when it occurs on your workbook. If you would like to turn it on, all you have to do is enable iterative calculations from the options. To start, click on the ‘File’ tab. Then, select ‘Options’ (the lowest options on the left-hand bar).

Locating Circular References. A circular reference occurs when a formula directly or indirectly refers to its own cell. This causes the formula to use its result in the calculation, which can create errors. When a workbook contains a circular reference, Excel cannot automatically perform calculations. Remove all formula references but keep values in cells with copying and pasting. Please do as follows to remove all formula references but keep values in specified cells in Excel. Select the cells you need to remove all references, then press Ctrl + C keys, keep these cells selected, right click and select Values under Paste Options section.

A circular reference is when a cell refers to itself directly or indirectly.

Are circular references bad?

In most cases, a circular reference should and can be avoided with some planning. However, in a complex financial, I found it easier to just use circular references in certain areas.

Circular References in Financial Models

Circular references are used to help calculate cash balances. Let’s walk through two typical cases.

Interest

The cash sitting in the bank generates interest. The interest income is taxed and lowers the net income. More cash -> more interest -> more tax -> lowers net income -> effects cash.

See the example below. To determine the amount of interst, we use an average of the forecasted beginning and ending cash balances. It’s not fair to use just the beginning or the ending cash balances to calculate interest because over the time period that balance will change.

Think about it another way, if you have $100 in the bank at the beginning of the month and $200 at the end earning 2% a month, what should the interst earned be? $2 of $4? Neither, it should be something in the middle because your cash blance grew during the month on its way to $200. So for simplicity of forecasting, we just average the beginning and the end and say $3 ($100+$200)/2 * 2%. It’s not perfect, but it’s a step in the right direction.

Debt

The amount of cash shoftfall determines the borrowing needs which determines the interest expense which determines the amount of debt.

How to enable circular reference

You have to check “Enable Iterative Calculation” in Excel Options -> Formulas -> “Enable iterative calcuation”
Maximum iterations should be 100 (default).

What happens when your circular reference errors out?

This happens pretty often as you’re developing your model because if you pass an error into a circular reference, by definition it won’t be able to solve the equation.

See the example below. All the forumlas are correct, but somewhere in the process there was a mistake made and it threw off all the calculations.

You can resolve this with a commonly used “jumpstart”. All bankers use this, so it’s not some random hack. Jumpstart is a two-part formula you stick into cell where there an error would throw off the ciruclar reference.
The first part is to define a cell called jumpstart and the value will be TRUE or FALSE.
The second part is to change a row of your formulas to incorporate jumpstart. In the example below, we’ve incorporate into the average cash calculation by changing it to =IF(Jumpstart,1,(C42+C40)/2) instead of =(C27+C25)/2

This means if Jumpstart is TRUE, insert 1, otherwise calculate the average. By inserting the 1, it allows the calculations to work again…by giving the calculation a “jumpstart” with a value instead of an error.

To see Jumpstart in action
1. Change the FALSE next to “See Error” to TRUE and then back to FALSE. This simulates as if an error was made and then corrected.
2. Change the FALSE next to “Jumpstart” to TRUE, this will fix the errors by making the average cash $1.00. Change back to FALSE (to turn off Jumpstart) and it will revert back to normal calculations.

** Modeling Tip – If/Else is a powerful forumla. Learn it and use it.

Millions of people using Excel don’t get why they see the “circular reference” error message right after they’ve entered a formula. The message means that your formula is trying to calculate its own cell–kind of like when a dog chases its own tail.

Because so many of you search on “circular reference,” we thought we should very clearly explain how to remove or fix your formula in Excel Help on Office.com.

Here’s one tip. Sometimes the first step in resolving the issue is figuring out which cell contains the wayward formula–not an easy task when a worksheet can contain dozens of them. Because there can be so many, Excel has a built-in sleuth to help you find it. Just look for the Error Checking option on the Formula tab.

How To Turn Off Circular Reference In Excel For Macbook Pro

The Office.com article “Remove or allow a circular reference” shows you how to use the Circular References option, and other tips and trick for figuring out how to make that error message go away.