 Gross margin is the money left over after subtracting cost of goods sold Determine the number of customers

stomers lost during the month, the number

from revenue. To compute - the gross margin, simply subtract cost of of new customers is added to the number of customers at the beginning
goods sold from revenues. For gross margin percent, divide the gross of the month. Then the number of customers at the end of the month is
margin by revenue. subtracted from that total. the number of customers lost during
the month is divided by the number of customers at the beginning of the
Gross Margin = COGS – Revenue --- Gross Margin: =C3-C4
month to get the churn rate.
Gross Margin Percentage = Gross Margin / Revenue ---
Customer lost = new customers + beg. customers – end. Customer
Gross Margin Percent: =C5/$C$3
Churn rate = Customer lost/ beg. customers
 Markup is the percentage added to costs to arrive at a selling price.
Annual churn rate = customer lost/average(beg. Customer & end. Customer)
The markup is computed by dividing the selling price by the cost and subtracting 1:
 Customer Lifetime Value (CLV) is a calculation that estimates the gross
=(C3/C2)-1
margin contributed by one customer over that customer’s life.
 Earnings before interest and taxes (EBIT) and earnings before interest,
Gross margin: = Revenue - COGS
taxes,
Average customer margin: = Gross Margin/AVERAGE(end. customer, C10)
depreciation, and amortization (EBITDA) are common calculations for evaluating
Customer Lifetime Value: = Average customer margin / Churn Rate
the
 Employee turnover is a measure of how well an organization is hiring and
results of a business. Both are computed by adding back certain expenses to
retaining talent. A high turnover rate indicates that the organization is not
earnings, also known as net profit.
hiring the right people or not retaining people.
EBIT:=C18+VLOOKUP("InterestExpense",$B$2:$C$18,2,FALSE)+
Employee turnover is simply the ratio of separations to average monthly
VLOOKUP("Income Tax Expense",$B$2:$C$18,2,FALSE)
employment. The AVERAGE function is used to calculate the average
EBITDA:=C20+VLOOKUP("DepreciationExpense",$B$2:$C$18,2,FALSE)+
ending count of employees over the months. Separations are summed
VLOOKUP("Amortization Expense",$B$2:$C$18,2,FALSE)
using SUM and are divided by the average monthly employments.
 Cost of goods sold refers to the amount you paid for all the goods you
Employee turnover = Separations / average monthly employee
sold.
 Converting Interest Rates
COGS = Goods Avai. For Sale – End. Inventory
Two common methods for quoting interest rates are the nominal rate and the
 Return on assets (ROA) is a measure of how efficiently a business is using
effective rate:
its
Nominal rate: This is the stated rate and is usually paired with a compounding
assets to generate income.
period, for example.
To compute ROA, divide the profits for a period of time by the average of the
Effective rate: This is the actual rate paid. If the nominal rate period is the same as
beginning and ending total assets.
the compounding period, the nominal and effective rates are identical. However,
ROA = the profits for a period of time / the average of the
as is usually the case, when the interest compounds over a shorter period than the
beginning and ending total assets.
nominal rate period, the effective rate will be higher than the nominal rate.
ROA = Net profit / average total assets
Effective Rate: =EFFECT (Given Nominate Rate,12)
Another common profitability measure is return on equity (ROE).
Nominal Rate: =NOMINAL (given effective rate,12)
 ROE = Net profit/ average total equity
Both EFFECT and NOMINAL take two arguments: the rate to be converted
 Break-even - To determine it, the business estimates its fixed expenses as
and the npery argument. The rate to be converted is the effective rate for
well as the percentage of each of its variable expenses. Using those
NOMINAL and the nominal rate for EFFECT. The npery argument is the number
numbers, it can back into a revenue amount that results in break even.
of compounding periods in the nominal rate period. In this example, the nominal
 Customer churn is the measure of how many customers you lose in a given
rate is annual because the term APR was used. A year has 12 months, so your
period.
nominal rate has 12 compounding periods. If, for example, you had a loan with an represent the original amount of the loan. Starting in H11 and continuing down to
APR that compounded daily, the npery argument would be 365. H370, the formula =H10-F11 reduces the balance by the principle portion of the
 Creating a Loan Payment Calculator payment.
=PMT (interest rate/12, years*12, amount borrowed,0,0) The final step is to hide rows beyond the loan term. You accomplish this task with
The PMT function takes three required arguments and one optional argument: conditional formatting that changes the font color to white. A white font color
rate (required): The rate argument is the annual nominal interest rate divided by against a white background effectively hides the data.
the =$D12>$C$4*12
number of compounding periods in a year. In this example, the interest compounds  Creating a Variable-Rate Mortgage Amortization Schedule
monthly, so the interest rate in C3 is divided by 12. The Rate column uses a VLOOKUP with a fourth argument of TRUE. The fourth
nper (required): The nper argument is the number of payments that will be made argument of TRUE requires that the rate table be sorted in ascending order. Then
over the life of the loan. Because your user input asks for years and the payments VLOOKUP looks up the payment number in the rate table. It doesn’t require an exact
are monthly, the number of years in C4 is multiplied by 12. match but returns the row where the next payment number is larger than the
pv (required): The pv argument, or present value, is the amount being borrowed. lookup value.
Excel’s loan functions, of which PMT is one, work on a cash flow basis. When you  A date-based amortization schedule
think about present value and payments as cash inflows and outflows, it’s easier to To modify the schedule to show the dates, follow these steps:
understand when the value should be positive or negative. 1. Enter the first payment date in cell D11.
If you want the PMT function to return a positive value, you can change the pv 2. Enter the below formula in D12 and fill down.
argument to a negative number. =DATE(YEAR(D11),MONTH(D11)+1,DAY(D11))
 Alternative: Creating an amortization schedule. With the payment amount 3. Change the Pmt No column in the rate table (cells K9:L23) to the date the rate
calculated, you can create an amortization schedule that shows how much changed.
of each payment is principle and interest and what the loan balance is after 4. Change the formula in the conditional formatting to the following formula:
each payment. =$D12>=DATE(YEAR($D$11),MONTH($D$11)+($C$4*12),DAY($D$11))
Pmt No: The number of the payment being made. You enter 1 into D11. Then you  Calculating Depreciation
enter the formula =D11+1 into D12 and copy it down to D370. (Your amortization Excel provides a number of depreciation-related worksheet functions including DB,
schedule can handle 360 payments.) DDB, SLN, and SYD.
Pmt Amt: The amount of the PMT calculation rounded to the nearest penny. The depreciation for the first and last year of an asset’s life is usually different than
Although for the middle year. A convention is employed so that a full year’s depreciation is
Excel can calculate a lot of decimal places, you can write a check only for dollars and not taken for the first year. Common conventions are half-year, mid-month, and
cents. This means that there will be a small balance at the end of the loan. You enter mid-quarter. For the half-year convention, the asset is assumed to have been
the formula =-ROUND($C$6,2) into E11 and fill it down through E370. purchased at the halfway point of the year; consequently, one half of a normal
Principle: The amount of each payment applied to the loan balance. You enter the year’s depreciation is recorded for that year.
formula =E11-G11 into F11 and fill it down through F370. Asset No.: A unique identifier for each asset. It’s not necessary for the schedule, but
Interest: The amount of each payment that is interest. The balance after the prior is handy for keeping track of assets.
payment is multiplied by the interest rate divided by 12. The total is rounded to two Cost: The amount paid to put the asset in service. This amount includes the price
decimal places. Enter the formula =ROUND(H10*$C$3/12,2) into G11 and fill it paid
down for the asset, any taxes associated with purchase, the cost to ship the asset to its
through G370. place
Balance: The balance of the loan after the payment. Enter the formula =C2 in H10 to
of service, and any costs to install the asset so that it’s ready for use. This amount is conservative, you might pick a lower rate — something you’re sure you can achieve.
also known as basis or cost basis. If you were to use the money to pay off a loan with a fixed rate, the discount rate
Year Acquired: The year the asset was put into service. This year may be different would be easy to determine.
from the year the payment was made to purchase the asset. It determines when nper: The nper is the period of time to discount the future value. The rate and the
depreciation starts. period must be in the same units. That is, if you enter an annual rate, nper must be
Useful Life: The number of years you estimate that the asset will provide service. expressed as years. If you use a monthly rate, nper must be expressed as months.
The formula in F3:N7 is as follows: pmt: The pmt argument is the regular payments received over the discount period.
=IF(OR(YEAR(F$2)<$D3,YEAR(F$2)>$D3+$E3),0,SLN($C3,0,$E3))* When there is only one payment, as in this example, that amount is the future value
IF(OR(YEAR(F$2)=$D3+$E3,YEAR(F$2)=$D3),0.5,1) and the payment amount is zer. Nutf8o. The pmt must also the match the nper
 Alternative: Accelerated depreciation argument.
The straight-line method depreciates an asset equally over all the years of its If your nper is 10 and you enter any nonzero pmt, PV assumes that you’ll get that
useful life. Some organizations use an accelerated method, which is a method that payment amount 10 times over the discount period. The next example shows a
depreciates at a higher rate at the beginning of an asset’s life and a lower rate at the present value calculation with payments.
end. The theory is that an asset loses more value when it is first put in service than fv: The future value amount is the amount you will receive at the end of the
in its last year of operation. discount period. Excel’s financial function works on a cash flow basis. That means
Excel provides the DDB function (double-declining balance) for accelerated the future value and present value have opposite signs. For this example, the future
depreciation. DDB computes what the straight-line method would be for the value was made negative so the formula result would return a positive number.
remaining asset value and doubles it. The problem with DDB is that it doesn’t type: The type argument can be 0 if the payments are received at the end of the
depreciate the whole asset within the useful life. The depreciation amount gets period or 1 if the payments are received at the beginning of the period. The type
smaller and smaller but runs out of useful life before it gets to zero. argument has no effect on this example because the payment amount is zero. The
The most common application of accelerated depreciation is to start with a type argument can be omitted, in which case it is assumed to be 0.
declining balance method, and after the depreciation falls below the straight-line Alternative: Calculating the present value of future payments
amount, the method is switched to straight line for the remaining life of the asset. Another use of PV is to calculate the present value of a series of equal future
Fortunately, Excel provides the VDB function, which has that logic built in. Figure 7- payments.
18 shows a depreciation schedule using the VDB-based formula as follows:  Calculating Net Present Value
=IF(OR(YEAR(F$2)<$D3,YEAR(F$2)>$D3+$E3),0,VDB($C3,0,$E3*2,IF(YEAR(F$2) The NPV (net present value) function is the Excel solution to calculating the present
=$D3,0,IF(YEAR(F$2)=$D3+$E3,$E3*21,(YEAR(F$2)-$D3)*2- value of uneven future cash flows. To determine whether this investment is worth
1)),IF(YEAR(F$2)=$D3,1,IF(YEAR(F$2)=$D3+$E3,$E3*2,(YEAR(F$2)$D3)*2+1)))) your while, you can use the following NPV function to calculate the net present
 Calculating Present Value value of that investment: =NPV (Desired Return, expected future cash flow C2:C11)
The time value of money (TVM) is an important concept in accounting and finance. NPV discounts each cash flow separately based on the rate, just as PV value does.
The idea is that a dollar today is worth less than the same dollar tomorrow. Excel Unlike PV, however, NPV accepts a range of future cash flows rather than just a
provides several functions for dealing with TVM, such as the PV function for single
calculating the present value. In its simplest form, PV discounts a future value payment amount. NPV doesn’t have an nper argument because the number of
amount by a discount rate to arrive at the present value. values in the range determines the number of future cash flows.
The PV function accepts five arguments: Alternative: Positive and negative cash flows
rate: Also known as the discount rate, the rate argument is the return you think In the previous example, you were asked to make a large, up-front investment to
you could make on your money over the discount period. It is the biggest factor in get future cash flows. Another scenario in which you can use NPV is when you make
determining the present value and can also be the hardest to determine. If you’re
smaller payments at the beginning of the investment period with the expectation of
future cash inflows at the end.
 Calculating an Internal Rate of Return
You can use the Excel IRR function to calculate the internal rate of return of future
cash flows. IRR is very closely related to NPV. IRR computes the rate of return that
causes the NP of those same cash flows to be exactly zero.
For IRR, you have to structure the data a little differently. You have to have at least
one positive and one negative cash flow in the values range. If you have all positive
values, that means you invest nothing and only receive money. That would be a
great
investment, but it’s not very realistic. Typically, the cash outflows are at the
beginning of the investment period and the cash inflows are at the end. But it’s not
always that way, as long as there is at least one inflow and one outflow.
=IRR(C3:C10,0.08)
Alternative: Nonperiodic future cash flows
XIRR requires one more argument than IRR does: dates. IRR doesn’t need to
know the dates because it assumes that the cash flows are the same distance apart.
Whether they are one day or one year apart, IRR doesn’t care. The rate it returns
will be consistent with the cash flows. That is, if the cash flows are annual, the rate
will be an annual rate. If the cash flows are quarterly, the rate will be quarterly.
Tip: XIRR has a related function for calculating the net present value of nonperiodic
cash flows called XNPV. As does XIRR, XNPV requires a matching range of dates.
=XIRR(C3:C17,B3:B17,0.08) --- c=cash flows, b=dates, rate
Internally, XIRR works much the same as IRR. It calculates the present value of
each cash flow individually, iterating through rates until the sum of the present
values is zero. It bases the present-value calculations on the number of days
between the current cash flow and the one just previous in date order. Then it
annualizes the rate of return.